Introduction
Every consumer’s target is maximizing the utility from a product that translates to the betterment of their welfare. However, they may fail to achieve total satisfaction due to some challenges. The consumer welfare maximization problem is where they cannot reach the level of satisfaction they want. It arises due to various reasons, such as impulse buying, which later causes consumers’ regrets. Loyalty to specific products and shops also contributes to the inefficiency of receiving the highest. Consumer welfare maximization problems may also arise when consumers have a sense of morality. For instance, when consumers cannot take alcohol as a refresher due to a moral stand, they do not achieve the highest welfare.
A consumer expects the best service from a product to be in a better state than they were before consumption. Consumer welfare is at a climax when the demand equals the supply at a competitive equilibrium. Many consumers are willing to pay more for items with the highest satisfaction levels (Kabir, 2019). Consumers aim for the best satisfying commodities at a considerable cost. On the other hand, the seller’s objective maximizes their income. A conflict arises between the two since the consumers want quality products at low prices that are difficult for the supplier to offer.
Characteristics and Assumptions Regarding Consumer Welfare Maximization
Consumer welfare maximization is applicable in determining the wellbeing of a person. The consumer cannot take more of an item whose utility is low, but the cost is high. Higher demand for an item shows that the consumer is more satisfied.1 Consumer satisfaction is crucial when fulfilling the client’s welfare. The buyer will work harder to gain more pleasure from a product and maximize their wellbeing.
A few assumptions exist when determining the maximum welfare of a consumer. The Pareto efficiency for competing firms is one of the assumptions that stand. It dictates that a change in the allocation of resources for one firm affects the plans of the other. An increase in the control for resources for one firm denies the others a part of the original amount. Therefore, the customer’s wellbeing depends on the Pareto efficiency since their demands change based on the suppliers’ behavior. When one firm is affected negatively, they offer poor quality goods or demand high prices, discouraging the customers. On the other hand, the other competitor’s state improves, and customers prefer them the most. When a firm is positively affected, its customers enjoy optimum wellbeing while those using competitors’ goods suffer.
Employment rate, wages, prices, and interest rates are the factor that influences the consumer’s demand and also affect the consumer’s welfare. When the income increases and prices remain constant, the customer’s interest increases since purchasing power increases. The purchaser can buy more of the products at the prevailing prices. When the employment rate is high, the consumers also demand more products from suppliers since money is available. However, interest rates inversely affect consumer welfare. Customers will find it difficult to purchase more commodity units when the interest rates are high, and the prices don’t reduce. Interest rates are the profits a lender earns for money loaned out to people. The loanee faces difficulty in purchasing a commodity in excess because the interest fee reduces the worth of their future income. When the value of future income is low, the purchasing power is also typical, and consumer happiness is not maximum.2 These factors affect the above scenario based on how they affect consumers’ purchasing power.
The customer’s interest is to maximize their welfare from a product encourages competition within firms that offer close substitute goods. The distributor works harder to ensure that customers obtain maximum utility from their products at a reasonable price. On the other hand, the customer selects the commodities that offer them more satisfaction at a relatively low cost. Buyers want to maximize the value of their money and obtain the most favorable goods. In this case, the suppliers improve the quality of their products to attract more customers and fight the competing firms based on quality and prices. The sellers maximize consumer wellbeing by offering more secure goods. Clients should receive assurance that the goods they consume are harmless for human consumption. Customers tend to avoid a product whose quality and safety are questionable, hence more efforts to secure all goods sold by the distributor.
Calculation of the Consumer Welfare Maximization Problem
The problem of consumer welfare maximization is measurable in three formats: consumer surplus, compensating variation, and equivalent variation. In the first format, consumer safety is measurable using the concept of the customer surplus that calculates the monetary difference between the highest amount a customer is willing to spend on buying a commodity and the actual amount they spend.3 This concept indicates the extra amount that the buyer is willing to pay for an item. In the graph below, when the initial price is A and the second one is D, the change in consumer surplus is the difference between the areas, A
Additionally, consumer welfare is measurable through compensating variation. A compensating variation measures customer wellbeing by studying the price change when the utility is constant. The compensating variation involves evaluating the amount that a consumer would demand to be compensated in case of a price change to maintain their satisfaction—the point of equilibrium changes when an economic change occurs. When the economy progresses positively, the compensating variable is the maximum a consumer is willing to pay for the transition to proceed.5 In contrast, when there is a negative implication on the economy, the compensating variation is the minimum amount a customer is willing to receive, to accept the difference. For example, when the price has increased, the economic value of a commodity reduces hence a negative impact on affordability. The minimum is the amount the customer would be willing to receive to return to her original position.
Lastly, consumer welfare maximization can be measured using the equivalent variation of the adjustment of the consumer’s income to a state where the consumer utility equally changes with the change in prices.4 The process would give the customer an extra unit of a commodity when the economy changes positively, for example, through a price fall. The equivalent variation helps the consumer prepare for an economic change in advance and maintains the customer’s welfare. The consumer welfare is maximum when an equivalent variation receives a positive economic alteration. Conversely, in a negatively behaving economy, the equivalent would be the amount a customer lacks to reduce their utility for the change to occur. Like the compensating economy, equivalent variation holds the utility constant and compares the new price with the original level of the consumer’s satisfaction.
Consumer welfare maximization helps the economic progress and ensures the smooth operation of businesses and the satisfaction of individuals fully. It creates a sustainable environment for the customers since they access quality goods from the suppliers.5 Competition within the business lines creates an excellent environment for each supplier to exist and operate independently. Consumer safety growth ensures that clients acquire the best from a consumption bundle as they prefer one commodity due to the varying satisfaction levels. The consumer aims at optimizing their welfare and promotes the existence of varying consumer preferences over things existing in the market. Client welfare is vital for the government as sellers provide amenities to the society on behalf of the government and ensure progress in the existence of the needs. The government obtains taxes from commodities facilitating its operations.
Conclusion
Understanding the consumer welfare maximization problem is crucial since it provides the client with ideas on which goods they should consume most. It encourages sellers to exist in the market, especially when people prefer more of their products. Consumer welfare maximization also enables the buyer to buy the goods and services, creating a continuous flow of labor in the market. Consumer welfare maximization also helps improve the state of the customers positively. The customer quickly receives goods or services that help sustain them. The necessities make it easy to maintain life and settle down in the environment without trouble. Consumers demand commodities and improve trades since more sellers join the market to supply the items requested. It creates a market flow by attracting both the buyer and the seller.6 Client welfare also supports competition since the consumer purchases the most satisfying items from the best seller.
Consumers and distributors should understand the problem of client welfare maximization since it helps them decide what goods to purchase and produce, respectively. Resolving the issue ensures that consumers get the most utility from the products they make. Conversely, the producers learn what quantity to create when specific occurrences alter the client’s purchasing power. The consumer welfare maximization problem also encourages the buyers in the budget since consumers want more utility from products they can afford. Simple calculations using the consumer surplus method, compensating variation, and equivalent variation help the budgeters to determine how much to spend for maximum utility and profits.
References List
Brandl, F., Brandt, F., and Hofbauer, J., ‘’Welfare maximization entices participation’, Games and Economic Behavior, Vol. 114, 2019, pp. 308-314.
Brynjolfsson, E., Eggers, F., and Gannamaneni, A. ‘Measuring Welfare with Massive Online Choice Experiments: A Brief Introduction’ AEA Papers and Proceedings, Vol. 108, 2018, pp. 473-476.
Elliott, M., and Golub, B., ‘A Network Approach to Public Goods’, Journal of Political Economy, Vol. 127, No. 2, 2019, pp. 730-776.
Glick, M., ‘The Unsound Theory Behind the Consumer (and Total) Welfare Goal in Antitrust’, The Antitrust Bulletin, Vol. 63 No. 4, 2018, pp. 455-493.
Kabir, P., ‘Consumer Welfare and Product Creation: The Credit Supply Channel’, SSRN Electronic Journal, 2019.
Leung, J., and Li, Z., ‘Big-Box Store Expansion and Consumer Welfare, 2021, pp. 1-66, Web.
Footnotes
- M. Elliott, and B. Golub, ‘A Network Approach to Public Goods’, Journal of Political Economy, Vol. 127, No. 2, 2019, p. 745.
- J. Leung, and Z. Li, ‘Big-Box Store Expansion and Consumer Welfare, 2021, p. 39, Web.
- E. Brynjolfsson, F. Eggers, and A. Gannamaneni, ‘Measuring Welfare with Massive Online Choice Experiments: A Brief Introduction’ AEA Papers and Proceedings, Vol. 108, 2018, p. 475.
- F. Brandl, F. Brandt, and J. Hofbauer, ‘’Welfare maximization entices participation’, Games and Economic Behavior, Vol. 114, 2019, p. 312.
- M. Glick, ‘The Unsound Theory Behind the Consumer (and Total) Welfare Goal in Antitrust’, The Antitrust Bulletin, Vol. 63 No. 4, 2018, p. 489.