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When producer surplus underestimates rents


  • Gregg Frasco
  • Chulho Jung


This paper demonstrates for the long run that producer surplus exactly equals the sum of rents paid to competitively purchased inputs and fails to account for rents paid to monopsonized inputs. Therefore, in the long run, whenever one or more inputs are subject to monopsony buying power, producer surplus underestimates rents. Because the concept of producer surplus is often used to help compare the welfare effects of alternative economic policies, the result is significant. Copyright International Atlantic Economic Society 2001

Suggested Citation

  • Gregg Frasco & Chulho Jung, 2001. "When producer surplus underestimates rents," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 29(4), pages 393-405, December.
  • Handle: RePEc:kap:atlecj:v:29:y:2001:i:4:p:393-405
    DOI: 10.1007/BF02299329

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    References listed on IDEAS

    1. Hazilla, Michael & Kopp, Raymond J, 1990. "Social Cost of Environmental Quality Regulations: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 853-873, August.
    2. William M. Boal & Michael R. Ransom, 1997. "Monopsony in the Labor Market," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 86-112, March.
    3. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-827, August.
    4. Martin, Will & Alston, Julian M, 1997. "Producer Surplus without Apology? Evaluating Investments in R&D," The Economic Record, The Economic Society of Australia, vol. 73(221), pages 146-158, June.
    5. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-349, April.
    6. Bruce A. Babcock & William E. Foster, 1992. "Economic Rents Under Supply Controls with Marketable Quota," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 74(3), pages 630-637.
    7. Keith O. Fuglie, 1995. "Measuring Welfare Benefits from Improvements in Storage Technology with an Application to Tunisian Potatoes," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(1), pages 162-173.
    8. Roy Boyd & Kerry Krutilla, 1992. "Controlling acid deposition: A general equilibrium assessment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 2(3), pages 307-322, May.
    9. Kalt, Joseph P., 1989. "Exhaustible resource price policy, international trade, and intertemporal welfare," Journal of Environmental Economics and Management, Elsevier, vol. 17(2), pages 109-126, September.
    10. McCulloch, Rachel & Yellen, Janet L., 1980. "Factor market monopsony and the allocation of resources," Journal of International Economics, Elsevier, vol. 10(2), pages 237-247, May.
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    Cited by:

    1. Tehrani Nejad Moghaddam, Alireza & Michelot, Christian, 2009. "A contribution to the linear programming approach to joint cost allocation: Methodology and application," European Journal of Operational Research, Elsevier, vol. 197(3), pages 999-1011, September.
    2. Gregg Frasco, 2002. "A comparison of rents and producer surplus when industry input supply functions are interdependent," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(4), pages 403-413, December.

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