The Benevolent Social Planner

To evaluate market outcomes we introduce into our analysis a new hypothetical character called the benevolent social planner. The benevolent social planner is an all-knowing all-powerful well-intentioned dictator. The planner wants to maximize the economic well-being of everyone in society. What do you suppose this planner should do? Should he just leave buyers and sellers at the equilibrium that they reach naturally on their own? Or can he increase economic well-being by altering the market outcome is some way?

To answer this question the planner must first decide how to measure the economic well-being of a society. One possible measure is the sum of consumer and producer surplus which we call total surplus. Consumer surplus is the benefit that buyers receive from participating In a market and producer surplus is the benefit that sellers receive. It is therefore natural to use total surplus as a measuer of society’s economic well-being.

Total surplus in a market is the total value to buyers of the goods as measured by their willingness to pay minus the total cost to sellers of providing those goods.

If an allocation of resources maximizes total surplus we say that the allocation exhibits efficiency. If an allocation is not efficient then some of the gains from trade among buyers and sellers are not being realized. For example an allocation is inefficient if a good is not being produced by the sellers with lowest cost. In this case moving production from a high-cost producer to a low-cost producer will lower the total cost to sellers and raise total surplus. Similarly an allocation is inefficient if a good is not being consumed by the buyers who value it most highly. In this case moving consumption of the good from a buyer with a low valuation to a buyer with a high valuation will raise total surplus.

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