2. Show how each of the following three actions reduces total surplus:
Having Josey consume one fewer pepper and Casey one more pepper than in the market equilibrium.
If Josey consumes one fewer pepper, she loses $0.60 (her willingness to pay for her second pepper); if Casey consumes one more pepper, he gains $0.30 (his willingness to pay for his fourth pepper). This results in an overall loss of consumer surplus of $0.60 − $0.30 = $0.30.
Having Cara produce one fewer pepper and Jamie one more pepper than in the market equilibrium.
Cara’s cost of the last pepper she supplied (the third pepper) is $0.40, and Jamie’s cost of producing one more (his third pepper) is $0.70. Total producer surplus therefore falls by $0.70 − $0.40 = $0.30.
Having Josey consume one fewer pepper and Cara produce one fewer pepper than in the market equilibrium.
Josey’s willingness to pay for her second pepper is $0.60; this is what she would lose if she were to consume one fewer pepper. Cara’s cost of producing her third pepper is $0.40; this is what she would save if she were to produce one fewer pepper. If we therefore reduced quantity by one pepper, we would lose $0.60 − $0.40 = $0.20 of total surplus.