Use the price each side actually receives or pays.
Consumer surplus is willingness to pay above the buyer price, over units purchased. Producer surplus is seller receipts above the original supply curve, over units sold. With a tax, use the seller price net of tax; with a producer subsidy, use the receipt including subsidy. Government revenue and spending are separate accounts, so private-surplus gains alone do not establish a social gain.
- Consumer surplus (CS)
- The amount buyers would be willing to pay above what they actually pay, added over units purchased. On the graph, it is the area under demand and above the buyer price.
- Producer surplus (PS)
- The amount sellers receive above the minimum needed to offer the units sold. It is the area above the original supply curve and below the seller price after tax or including subsidy.
- Government
- Government tax receipts and subsidy spending are separate from CS and PS. A rise in buyers' and sellers' combined gains is not enough to show that a subsidy is worth its public cost.
Read the surplus areas
Triangle calculation
For these straight curves, a surplus triangle has base = units traded and height = the per-unit price difference at the price axis. Area = 0.5 x base x height. Dollars per unit multiplied by units gives a dollar surplus.
Use the correct boundary
For CS, compare demand with the buyer price. For PS, compare the original supply curve with what sellers receive after tax or including subsidy. The tax-inclusive price paid by buyers is not what a taxed seller keeps.
Surplus is not all receipts
The whole price x quantity rectangle is spending or receipts. Surplus is only the relevant area between demand or supply and the price. It is not the full receipts rectangle, and production costs still matter when calculating profit.
Worked example: Compare the two price wedges
Demand is P=10-0.05 Q and original supply is P=2+0.05 Q. Before intervention, P=$6 and Q=80.
- Initially CS=0.5x(10-6)x 80=$160 and PS=0.5x(6-2)x 80=$160.
- A $2 tax gives Q=60, buyer price $7 and seller net price $5. CS=0.5x 3x 60=$90; PS=0.5x 3x 60=$90. Government revenue is $120.
- A $2 subsidy gives Q=100, buyer price $5 and seller receipt $7. CS=0.5x 5x 100=$250; PS=0.5x 5x 100=$250. Government spending is $200.
- The subsidy raises the sum of CS and PS by $180 but costs $200. These private-surplus accounts do not by themselves measure external effects or establish whether the policy is desirable.
Watch out for this
For a tax, shade producer surplus up to the price consumers pay.
Sellers do not retain the tax. Use their net price and the original supply curve.
Check your understanding
After a subsidy, buyers pay $4, sellers receive $6 including support, Q=40, and the linear supply curve starts at $2. What is producer surplus?
- $160
- $80
- $240