Significance Of Consumer's Surplus

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The concept of consumer's surplus has great practical importance, which are as follows:

1. Importance in public finance
Consumer's surplus is useful to a finance minister in imposing taxes and fixing their rates. He will tax those commodities in which the consumers enjoying much surplus. In such cases, the people would be willing to pay more than they actually pay. Such tax will bring more revenue to the state.

2. Importance to businessman and monopolist
The concept of consumer's surplus is very useful to the businessman. He can raise price of those commodities in which there is a large consumer's surplus. The seller will be able to raise price if he is monopolist and control the supply of the commodity.

3. Comparing advantages of different places
The concept of consumer's surplus enables us to compare the advantages of environment and opportunities. A person living in a developed area enjoys greater consumer's surplus than a person living in a remote area because the former is able to get all the amenities of life cheaply and easily. It also enables us ti compare standard of living of the people living in different parts of the world. The larger the consumer's surplus the better off is the people.

4. Measuring benefits from international trade
We can measure the benefit from international trade with the idea of consumer's surplus. Suppose that before entering into trade with another country we are prepared to pay $ 1000 for a computer. But after establishing trade relation, we get it for $ 750. The difference between what we were prepared to pay for the computer and what we actually pay is the consumer's surplus which measures the benefit fro international trade.

5. Distinction between value in use and value in exchange
The concept of consumer's surplus helps us to distinguish between value in use and value in exchange. Value in use means utility and value in exchange means the price of a commodity. Commodities like salt, post card, match box etc. have a great value in use but a very small value in exchange. Consumer's surplus from such commodities is very large because we are prepared to pay much more for such commodities than we actually pay.

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