should be). We know that the price of turkey adjusts to ensure that the quantity of
turkey supplied equals the quantity of turkey demanded. But, at this equilibrium,
is the quantity of turkey produced and consumed too small, too large, or just
right?
In this chapter we take up the topic of welfare economics, the study of how
the allocation of resources affects economic well-being. We begin by examining the
benefits that buyers and sellers receive from taking part in a market. We then examine
how society can make these benefits as large as possible. This analysis leads
to a profound conclusion: The equilibrium of supply and demand in a market
maximizes the total benefits received by buyers and sellers.
As you may recall from Chapter 1, one of the Ten Principles of Economics is that
markets are usually a good way to organize economic activity. The study of welfare
economics explains this principle more fully. It also answers our question
about the right price of turkey: The price that balances the supply and demand for
turkey is, in a particular sense, the best one because it maximizes the total welfare
of turkey consumers and turkey producers.