Chapter 8 — Further Reading

On consumer and producer surplus

Alfred Marshall, Principles of Economics, 8th edition, 1920 Marshall introduced the concept of consumer surplus in Book III, Chapter VI of his Principles. The presentation is the original and remains useful.

John R. Hicks, "The Rehabilitation of Consumers' Surplus," Review of Economic Studies, 1941 Hicks's classic paper on consumer surplus, including the technical extensions that allow it to be computed for multiple-good situations. More technical than Marshall but foundational for modern applied welfare economics.

Robert Willig, "Consumer's Surplus Without Apology," American Economic Review, 1976 A widely cited defense of consumer surplus as a practical welfare measurement tool. Willig argues that the simple calculation is usually a good approximation of more sophisticated welfare measures.

On welfare economics broadly

Vilfredo Pareto, Manual of Political Economy, 1906 Pareto's foundational treatment of efficiency in exchange. Available in modern translations.

Kenneth Arrow, Social Choice and Individual Values, 1951 Arrow's famous work on the impossibility of aggregating individual preferences into a coherent social welfare function. The "Arrow Impossibility Theorem" is a foundational result that limits what efficiency analysis can do for distributional questions.

Amartya Sen, Collective Choice and Social Welfare, 1970 Sen's foundational work on social choice theory, including extensive treatment of the limits of Pareto efficiency as a normative concept. Highly recommended.

John Rawls, A Theory of Justice, Harvard University Press, 1971 The most influential modern philosophical treatment of distributional justice. Rawls argues for the "difference principle" — that inequalities are justified only if they benefit the worst-off members of society. A direct challenge to pure efficiency-based reasoning.

On the efficiency-equity tradeoff

Arthur Okun, Equality and Efficiency: The Big Tradeoff, Brookings Institution, 1975 A classic short book on the efficiency-equity tradeoff by a former Council of Economic Advisers chairman. Okun's "leaky bucket" metaphor — that redistributing income from rich to poor inevitably "leaks" some of the value — is the canonical statement of the trade-off.

Anthony Atkinson, Inequality: What Can Be Done?, Harvard University Press, 2015 A more contemporary and more egalitarian-leaning treatment of the same questions. Atkinson, who died in 2017, was one of the most influential economists working on inequality. The book proposes specific policies based on his framework.

Robert Frank, Falling Behind: How Rising Inequality Harms the Middle Class, University of California Press, 2007 Frank argues that the surplus framework misses important features of how people experience inequality — particularly that "positional consumption" (status goods) creates externalities that the standard framework doesn't capture.

On taxes and surplus

Joel Slemrod and Jon Bakija, Taxing Ourselves, MIT Press, 2017 (5th edition) The best general-audience book on the U.S. tax system. The chapters on tax incidence, deadweight loss, and the optimal structure of taxation use the surplus framework throughout.

Jonathan Gruber, Public Finance and Public Policy, Worth Publishers, multiple editions The standard intermediate textbook on public finance. Surplus calculations and welfare analysis are throughout.

Emmanuel Saez and Stefanie Stantcheva, "Generalized Social Marginal Welfare Weights for Optimal Tax Theory," American Economic Review, 2016 A more recent technical paper on how to incorporate distributional concerns into welfare analysis. Useful as a preview of how modern economists think about combining efficiency and equity.

On cigarette taxes (case study 2)

Frank Chaloupka and Kenneth Warner, "The Economics of Smoking," in Handbook of Health Economics, 2000 A comprehensive review of the empirical literature on cigarette demand, taxation, and health effects. Cited in many subsequent studies.

Jonathan Gruber and Botond Köszegi, "Is Addiction 'Rational'? Theory and Evidence," Quarterly Journal of Economics, 2001 A foundational behavioral economics paper on whether smokers' willingness to pay reflects rational preferences or addiction-driven distortions. The authors argue for higher cigarette taxes on welfare-improving grounds.

Centers for Disease Control, Smoking-Attributable Mortality, Morbidity, and Economic Costs (multiple years) The CDC's official estimates of the health and economic costs of smoking. Free online.

Mark Bryan, Andrew Oswald, and others, "The Causal Effect of Smoking on Health," various papers A growing body of empirical work using natural experiments (e.g., changes in cigarette prices in different jurisdictions) to estimate the actual causal effects of smoking on health and wellbeing.

On the limits of the surplus framework

Daniel Kahneman and Amos Tversky, "Prospect Theory: An Analysis of Decision Under Risk," Econometrica, 1979 The foundational behavioral economics paper challenging the assumption that willingness to pay reflects rational preferences. We will see this in much more depth in Chapter 10.

Cass Sunstein, Why Nudge?, Yale University Press, 2014 A defense of "nudge"-based policy interventions, including arguments for why surplus-based welfare analysis sometimes systematically underestimates the welfare benefits of paternalistic policies on addictive or self-defeating goods.

Michael Sandel, What Money Can't Buy: The Moral Limits of Markets, Farrar, Straus and Giroux, 2012 A philosophical critique of the assumption that surplus-maximizing outcomes are the right outcomes for many domains. Sandel argues that some things — friendship, civic obligation, the dignity of human beings — should not be subjected to market-style trade-off analysis at all.

A reading order recommendation

If you have time for one of the books above, read Okun's Equality and Efficiency: The Big Tradeoff. It's short (about 130 pages) and the most direct extension of Chapter 8's central tension.

If you want to see the surplus framework applied to real policy debates in detail, read Gruber's Public Finance and Public Policy.

If you want to understand the limits of the framework, read Sen's Collective Choice and Social Welfare or Sandel's What Money Can't Buy.

Chapter 9 — International Trade — is next. It applies the surplus framework to tariffs and shows why economists are mostly in favor of free trade and why opposition to free trade is often grounded in distributional concerns the framework illuminates rather than in mistakes about the efficiency calculation.