Consumers’ surplus is the difference between the maximum buying price and the price paid.
If you’d be willing to pay a maximum of \($10\) for good X, but you pay only \($4\) for the good, then your consumers’ surplus is \($6.
Now,\) suppose you receive \($10\) consumers surplus on the first unit of good X that you buy, \($9\) on the second unit of good X, \($8\) on the third unit, and so on. How many units of the good will you buy? The answer is that you will continue to buy additional units of the good as long as you receive positive consumers’ surplus.
You will receive positive consumers’ surplus on items 1 through 10.
You will not receive any consumers’ surplus on the 11th unit, so you will stop buying at the 10th unit.
Now suppose that the seller of good X comes to you and says this: No longer will I allow you to buy individual units of good X. From now on, you must buy either 11 units or nothing at all. In other words, the seller of good X presents you with an “all-ornothing”
deal: Either buy all that he says you will buy (11), or buy nothing.
What would you do?
The answer is, it depends on the negative consumers’ surplus you would receive on the 11th unit? If things follow the path we have outlined—
according to which, for each additional unit of the good you buy, you receive \($1\) less in consumers’ surplus than you received for the previous unit purchased—then you will receive \($1\) in negative consumers’ surplus on the 11th unit. So, will you buy the 11 units or zero units?
Think things through in this way: If you buy 11 units, you will receive positive consumers’ surplus on units 1–10 and negative consumers’ surplus on the 11th unit. Thus, on units 1–10, you will receive a total positive consumers’ surplus of \($55\) (\($10\) on the first unit 1 \($9\) on the second unit 1 \($8\) on the third unit and so on) and you will receive a negative \($1\) in consumers’ surplus on the 11th unit. Fifty-five dollars minus \($1\) leaves you with \($54\) in consumers’
surplus if you buy all 11 units. Of course, if you don’t buy all 11 units, but instead choose to buy zero units, you will receive zero dollars in consumers’ surplus. So, the choice is between buying 11 units and receiving \($54\) in consumers’ surplus or buying zero units and receiving \($0\) in consumer’s surplus. Better the \($54\) in consumers’ surplus than the zero dollars.
Better to accept the “all” than the “nothing.” Of course, it is still better to buy only 10 units of good X than 11 units, but 10 units was no longer a choice. It was 11 or nothing. The all-or-nothing deal ended up reducing your consumers’ surplus (from \($55\) to \($54).
Now\) think of two institutions that sometimes offer, or threaten to offer, all-or-nothing deals. One is private firms. A cable company could offer you 100 channels to choose from for, say, \($2\) a channel a month. If you want to purchase 10 channels, then purchase 10 channels; if you want to purchase 14 channels, then purchase 14 channels. But cable companies do not usually sell channels this way.
Instead, they offer a number of all-or-nothing packages. Buy these 10 channels or buy nothing; buy these 50 channels or buy nothing.
It could very well be that some of the channels a consumer buys offer either no or negative consumers’ surplus, but still the overall package comes with positive consumers’ surplus, albeit not quite as much as would be the case if channels were selected one by one.
Or consider the purchase of a cell phone or cell phone plan.
Often, you choose a particular plan or a particular phone with a host of features. Your phone and plan may come with more features than you would buy if you purchased each feature separately. Still, both the plan and the phone may be worth it to you because, overall, you receive positive consumers’ surplus, albeit once again not as much as you might have received had you been able to decide on each feature separately.
Now move from private firms to government. There may be some things you receive from government—roads, schools, national defense, and so on—for which you receive positive consumers’
surplus. In other words, what you would have been willing to pay for each of these goods or services that you consume is more than what you pay in taxes. But then there might be some things you receive from government for which you receive negative consumers’
surplus.
While government doesn’t have to be an all-or-nothing deal—
it is possible to cut some things out of government and keep other things—often elected government officials threaten to cut some of the things for which people receive a positive consumers’ surplus if they aren’t willing to pay (through taxes) for some of the things for which they might receive negative consumers’ surplus. Here is a fictional, yet representative, scenario of how things might proceed at a local government public meeting:
Taxpayers: We don’t want to pay higher taxes.
City Council: Then we will have to cut services.
Taxpayers: Maybe that is the right thing to do, given these tight budgetary times.
City Council: Well, then, we might have to cut police and fire protection.
Taxpayers: But what about cutting all the waste in government?
Why not start there? Or what about cutting your salaries or putting off some of your proposed projects?
City Council: That might be very hard to do. We might need to start with police and fire protection.
Taxpayers: Give us a few minutes to think.
City Council: Take your time.