Chapter 7: Market Efficiency and Welfare
1. Emphasize to students that lost consumer and producer surplus are not just of minor importance in
considering efficiency issues. It is a large part of the efficiency rationale for opposing monopoly,
2. As a consumer surplus example, you might talk about the value to society of property rights, laws,
3. Make sure you emphasize the parallels between consumer surplus and producer surplus, so that
students understand that the underlying logic is the same; it is just applied to different market participants.
4. To show students the importance of correctly understanding incidence analysis as well as the political
incentives involved in tax policy, it is often worth discussing why there are so many hidden taxes,
5. Reiterate to students that as the elasticity of supply and/or demand gets greater, the good effect of a
tax–the tax revenue raised by the government–gets smaller and the bad effect--the welfare cost--gets
larger.
6. It is worth noting to students that anything that reduces the quantity traded below the supply and
7. Make sure students see that the tax incidence analysis can be used to evaluate the effects of
8. If you want to challenge your students, you could go beyond the welfare cost analysis in the book, and
show students that the marginal welfare cost of taxation rises much faster than the cumulative marginal