Question

Explain the concepts of consumer surplus and producer surplus in the market for
air travel. [10 marks]
(b) Discuss the view that a free market at competitive market equilibrium leads to the most
efficient allocation of resources from society’s point of view.

Answer 1

Consumer surplus in the market of air travel is the difference between their willingness to pay for the ticket and the actual price for it. Producer surplus shows the difference between the profit which producer gets in case of minimal price at which he is still ready to provide flights and actual profit at the current market price. Free market provides the most efficient allocation of resources because neither producer, nor consumer is forced to make a deal, all the subjects of the market have the goal to maximize benefits