Consumer Surplus & Price Policies

 Price ceiling
o Maximum price that seller may charge
 Price floor
o Minimum price that sellers may receive
 Consumer surplus
o The difference between the highest price a consumer is willing to pay for a good or
service and the price the consumer actually pays
 Producer surplus
o The diff between the lowest price a firm would be willing to accept for a good or service
and the price it actually recieves

What this book is all about?

Luke Freob

Rational-actor paradigm
 People act rationally, optimally, and self-interestedly. They respond to incentives

Why do people make mistakes?

 Either they don't have enough info to make a good decision
 Or, they don't have the incentive to do so

Methodology for Solving Problems?

 Who is making the bad decision?
 Do they have information to make a good decision?
 Do they have the incentive to make a good decision?
o Incentives
 Measure performance and then
 Reward good performance
 Solutions: 3 levers you can push
 1.) Let someone else make the decision (someone with better info or incentive)
 2.) Change the information flow (give more information to the current decision maker)
 3.) Change the incentives of the decision maker
o Change performance evaluation
o Or change how you reward goof performance