Social Welfare: Evaluating Change in Food Markets

Economic principles help us explain observed outcomes as the result of each person having made consistent choices from their limited options. This approach helps us predict how people respond to new circumstances, and also provides a framework for inference about changes in the level of multidimensional wellbeing that a population can reach when their circumstances change. The first section of this chapter shows how changes in welfare can be compared in terms of economic surplus for consumers, producers and others in each community. We show how the concept of economic surplus helps explain and guide decision-making around policy choices, with strengths and limitations relative to other approaches. In the second section of the chapter, we use economic surplus to begin analysis of market failures, starting with externalities. Externalities are the unintended impacts of market activity on other people who may be harmed or benefit from nonmarket side effects of production or consumption. We discuss the many externalities that arise in agriculture, food systems and health, using economic surplus to show how decision-makers can consider the interests of both market participants and people affected by nonmarket externalities.