The concept of consumer’s surplus has both theoretical as well as practical importance.
1. Conjectural Advantages:
- The concept enables us to compare the advantages of environment and opportunities or conjectural benefits. The conjectural benefits derived by people enable us to compare the standards of living in different parts of the world. If consumers’ surplus is more in any country, then living standards of the people are high and vice – versa. For example, the living standards of the people of USA or Japan is certainly more when compared to India because in those countries the national output, national income and per capita income of the people are high Thus, it helps to measure the volume of economic welfare of the people who live in different parts of the world.
2. Use in cost benefit analysis:
- Today the concept is extensively used in estimating the cost benefits of various investment projects both in the private and public sectors. Costs and benefits do not merely mean money costs and monetary benefits but also real costs and real benefits in terms of satisfaction and the amount of resource utilization. The quantum of consumers’ surplus derived from social projects like railways, roads, bridges, dams, flyovers, parks, libraries, water and electricity supply etc by consumers are definitely higher when compared to the amount of money spent on them. For example, a consumer would pay a very little amount of money to travel in a public transport vehicle than what he has to pay if he were to travel in an auto-rickshaw or taxi. The cost savings from these projects are directly derived from consumers’ surplus.
3. Use in public Finance:
- It is the basis to impose taxes on people. If consumer’s surplus is high in case of any product or service, then the finance minister can impose higher taxes on them and vice – versa. This is because people are ready to pay more prices for such products rather than go without them. It is the basis to declare whether taxation policy of a government is good or bad. If the gain to the government on account of tax collection is greater than the losses to the consumers on account of tax payment, it is a good taxation policy and vice – versa.
- In this case, the total tax amount collected by the government is greater than that of the total amount of sacrifice made by the people on account of tax payments.
- It is the basis to grant subsidy by the government to private entrepreneurs. If the amount of gain to the people on account of subsidy is greater than the financial loss to the government owing to the grant of subsidy, we can justify such subsidy and vice – versa. For example, if government grants subsidy to sugar, market price of sugar declines and consequently, more consumers would buy more quantity of sugar and enjoy greater amount of satisfaction.
4. Pricing of public utilities:
- The concept helps in determining prices of public utilities. In case of construction of railway lines, air ports, roads, bridges, generation and supply of electricity, water supply etc, and people enjoy enormous amount of surplus satisfaction. While fixing the prices of these services, or commodities, the government does not look into its production and supply cost. As they are public utilities, the government follows the policy of price discrimination.
5. Helps to resolve the paradox of value:
- Generally speaking market value of product depends on its demand and supply. In case of certain essential commodities like water etc supply will be more and as such its market price will be low. In these cases, marginal utility will be low whatever may be the value of total utility.
- In case, there is scarcity of a product in the market, its price would go up. In this case, marginal utility will be high whatever may be value of total utility.
- Commodities which have more value in use give more satisfaction than others which have more value in exchange. For example, in case of salt, match box, news paper etc total utility is more but marginal utility is less and as such we pay much less money for them. Value in use in case of such goods is much higher than their value in exchange.
- Commodities which have more value in exchange give less satisfaction than others which have more value in use. For example, in case of diamond, value in –exchange is more than value in use because in these cases, marginal utility is higher than total utility. Thus, the concept helps to distinguish between value in use and value in –exchange.
6. Use monopoly Pricing:
- It helps the monopolist to practice price discrimination. If consumers’ surplus is high, in case of any commodity or service, then the monopolist can charge higher prices and vice – versa.
7. Use in international Trade:
- It is the basis to import certain items from other countries. If consumers’ surplus is more in case of imported goods than domestically manufactured goods, in that case it is better to import.
- Similarly, if consumers’ surplus is low with in the country and high in other nations, in that case, it is better to export them to other nations.
8. Use in welfare Economics:
- It is used as a tool in welfare economics. The doctrine emphasis the advantages derived due to a fall in the prices of the commodities.
- Fall in price leads to rise in the real income of the consumer and this will definitely raise the level of welfare of the people, the level of economic well being of the people is higher in those countries.
- According to Dr. Little, the government should adopt those economic policies which promote consumers’ surplus. Such policies will certainly help to increase the economic welfare of the people to the maximum extent.
9. Use in introduction of new products:
- If consumers’ surplus is greater in the case of introduction of a new product than the disappearance of the old product, we can justify the introduction of a new product into the market. This helps the consumers to maximize their satisfaction. Thus the concept of consumers’ surplus has great practical application in all most all fields of economic activities.
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