Samuelson on Consumer Surplus

Paul Solman: Today’s Paul Samuelson excerpt explains the concept of “consumer surplus.” See the other transcripts we posted this week on the basics of economics here and here.) To Samuelson, it was the justification for the market system.

SAMUELSON: When I buy my Hershey bar at 50 cents a bar, and it’s the fourth one I ate that week, having the first one is more valuable to me, in utility terms, than the fourth one, because there’s the law of diminishing marginal utility. But I don’t pay more for the first than I pay for the last one, so I’m getting a consumer surplus on all the intra-marginal units, that’s the lingo, and to be born in the modern, rich world is to be born with a silver spoon in your mouth. What’s that silver spoon? It’s to be splashed with consumer surplus. Robinson Crusoe did not have all of these early utilities. His last unit was no better, no worse, than our last unit, but we have so many of those units, with all that extra pleasure at the beginning. That’s a very important.

To put it crudely, this is consumer surplus, If I had to buy the first good, and only that, I want it so badly that it’s worth $25 to me. And the second good is worth $18 to me,

Let’s calculate a value, in money terms, of the total utility that I get from buying several items of the same thing. The first one I would pay, if I had to, a very high price. Write it down on a slip of paper. Second one, I would not pay, having enjoyed the first one, quite so high a price. Write that down. Go down, now, to the market price, which is all that I have to pay. I’m getting a bonus – a consumer’s dollar bonus — of utility. A bonus of total utility measured in dollars. That is, the high money value of the first unit, the less-high value to me of the second, down to the actual price that I’m paying. Now, I don’t buy one more unit than that because its dollar value utility is no longer as high to me as the price I have to pay for it.

We should all realize, when we’re feeling proud of our own productivity and so forth, that we live in a world we never made, that was made for us, and that’s the important consumer surplus that comes with being a citizen in a rich American society and not a citizen in a poor Angolan society.

SOLMAN: You know, when I took microeconomics at [Harvard’s] Kennedy School [of Government], the public policy students were in their 30’s and they refused to believe that there was this consumer surplus, many of them. Eventually, they were browbeaten into submission. But their initial reaction was: ‘that’s not anything real.’

SAMUELSON: Just something Madison Avenue is palming off on us?

SOLMAN: Something like that. But it is real, isn’t it?

SAMUELSON: Yes, in fact, there’s a wonderful passage in my textbook. [He finds the passage]

I now quote from a distinguished earlier economist to illustrate how much consumer surplus we get in a rich modern society.

“The organizer of industry who thinks that he has, quote, made, unquote, himself and his business has found a whole social system ready to his hand and skilled workers, machinery, a market, peace and order, a vast apparatus, and a pervasive atmosphere, the joint creation of millions of men and scores of generations. Take away the whole social factor, and we have not Robinson Crusoe, with his salvage from the wreck and his acquired knowledge, but the naked savage, living on roots, berries and vermin.: Well, to try to give a dollar value to that benefit, which is the important benefit of economic growth, is the concept of consumer surplus.

SOLMAN: What it’s worth to you, but you don’t have to pay for it.

SAMUELSON: That’s right. The total monetary worth of the total utility you get, but you don’t have to pay because you only have to pay the lower marginal utility of the last unit.