I n t h I s c h a p t e r y o u w I l L

welfare economics,
the study of how
the allocation of resources affects economic well-being. We begin by examining the
benefits that buyers and sellers receive from taking part in a market. We then ex-
amine how society can make these benefits as large as possible. This analysis leads
to a profound conclusion: The equilibrium of supply and demand in a market
maximizes the total benefits received by buyers and sellers.
As you may recall from Chapter 1, one of the 
Ten Principles of Economics
is that
markets are usually a good way to organize economic activity. The study of wel-
fare economics explains this principle more fully. It also answers our question
about the right price of turkey: The price that balances the supply and demand for
turkey is, in a particular sense, the best one because it maximizes the total welfare
of turkey consumers and turkey producers.
C O N S U M E R S U R P L U S
We begin our study of welfare economics by looking at the benefits buyers receive
from participating in a market.
W I L L I N G N E S S T O PAY
Imagine that you own a mint-condition recording of Elvis Presley’s first album.
Because you are not an Elvis Presley fan, you decide to sell it. One way to do so is
to hold an auction.
Four Elvis fans show up for your auction: John, Paul, George, and Ringo. Each
of them would like to own the album, but there is a limit to the amount that each
is willing to pay for it. Table 7-1 shows the maximum price that each of the four
possible buyers would pay. Each buyer’s maximum is called his 
willingness to
pay,
and it measures how much that buyer values the good. Each buyer would be
eager to buy the album at a price less than his willingness to pay, would refuse to
w e l f a r e e c o n o m i c s
the study of how the allocation of
resources affects economic well-being
w i l l i n g n e s s t o p a y
the maximum amount that a buyer
will pay for a good
Ta b l e 7 - 1
F
OUR
P
OSSIBLE
B
UYERS
’
W
ILLINGNESS TO
P
AY