Final answer:
Total surplus is the addition of consumer surplus and producer surplus, being highest at market equilibrium. Price controls like ceilings and floors can reduce total surplus and create inefficiency. In the student example, the maximum possible total surplus is $60.
Step-by-step explanation:
Understanding Maximum Possible Total Surplus
In economics, the concept of total surplus comprises both consumer surplus and producer surplus. A consumer's surplus is the difference between their willingness to pay for a good or service and the actual price they pay, while producer surplus is the difference between the market price and the lowest price at which producers would be willing to sell. The maximum possible total surplus in a market occurs at the equilibrium price and quantity, where the sum of consumer and producer surpluses is at its highest, indicating an efficient allocation of resources without any deadweight loss. As seen in the given scenario, when market interventions such as price ceilings or floors are introduced, they can lead to a decrease in total surplus and create deadweight loss, demonstrating inefficiency in the market.
In the example provided, where Amy, Deborah, Van, and Carlos purchase haircuts, we calculate their individual surpluses and add them to find the total surplus, which amounts to $60. This calculation gives us a simple illustration of total surplus in a small market. When applied to broader market scenarios with price controls, the changes in consumer and producer surpluses can be visualized using demand and supply curves, identifying areas representing surpluses and deadweight losses due to such controls.