Some Practical Issues in Economic Surplus Measurement in Multi-Market Models

Despite continuing controversy, economic surplus has continued to be used in empirical cost-benefit analyses as a measure of welfare to producers and consumers. In this paper, the issue of measuring changes in producer and consumer surplus resulting from exogenous supply or demand shifts in multi-market models is examined using a two-input and two-output equilibrium displacement model. When markets are related through both demand and supply, significant errors are possible when using conventional economic surplus areas incorrectly as is evident in some applications in the literature.