Write down three limitations of consumer’s surplus.
Answers
Answer:Limitations of the Consumer’s Surplus:
Consumer’s surplus plays a great role in welfare economics. However, the concept is fraught with various difficulties since its measurement involves great complications.
The main limitations of the concept are:
Firstly, utility is not amenable to measurement. This concept largely depends on the measurability of utility. Utility, above all, varies from person to person, from commodity to commodity. Since tastes and preferences vary from person to person, one cannot measure surplus accurately.
Again, for conventional necessary goods (e.g., salt) it is not possible to measure excess benefit since the consumer may spend his entire income rather than go without it.
Under the circumstance, consumer’s surplus may be infinite. One even encounters problem in measuring surplus derived from substitute goods. Finally, goods having snob appeal may have lower degree of satisfaction or surplus when their prices fall.
Secondly, Marshall assumed diminishing marginal utility for commodity and constant marginal utility of money to explain his concept of surplus. But we know that, like commodities, marginal utility also has the tendency to decline when the stock of money increases.
In view of these problems associated with this concept, Prof. Nicholson argues that the consumer’s surplus is illusory, imaginary and hypothetical.
Explanation: