Why do economists emphasize maximization of consumer and producer surplus as an

Question

Why do economists emphasize maximization of consumer and producer surplus as an important goal of public policy? LO2 You are an MP considering how to vote on a policy that would reduce the economic surplus of workers by $1 million/year but increase the economic surplus of retirees by $10 million/year. What additional measure might you combine with the policy to ensure that the overall result is a better outcome for everyone? LO2, LO6 How do elasticity of supply and elasticity of demand affect the size of the economic surplus that a perfectly competitive market can offer? LO7

Explanation / Answer

ans 2) It is necessary to ensure that the policy is equally beneficial for both the workers and retirees.When the surplus falls for workers they will be demotivated to reduce working hours and retire earlier to take extra advantage of such benefits.Therefore ,MP needs to ensure that working hours are not affected this can be done by giving work based promotions , safety nets, social and medical benefits to workers.Such compensations can help substitute against such direct fall in surpluses.

3) The elasticity of demand refers to degree of responsiveness towwards the change in prices.Therefore when the prices are high the elasticity of supply can get impacted and expand size of economic surplus only if both the consumer and producer surplus increases.But the demand will get affected , therefore degree of chnage of demand and supply will determine total surplus generated both by demand and supply side.

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