Economics Consumer Surplus And Producer Surplus Questions
The impact of external costs on consumer surplus and producer surplus is that they reduce both of these measures. External costs refer to the costs imposed on society as a whole that are not directly borne by the consumers or producers involved in a transaction. When external costs are present, the price paid by consumers does not fully reflect the true cost of production, leading to an overallocation of resources towards the production of the good. This results in a decrease in consumer surplus as consumers are paying more for the good than they would if the external costs were internalized. Similarly, external costs also reduce producer surplus as producers are not fully compensated for the true cost of production. Overall, external costs lead to a decrease in both consumer surplus and producer surplus.