Final answer:
Consumer surplus represents the gap between what consumers are willing to pay versus the equilibrium price, while producer surplus is the difference between the market price and the producers' costs. In the scenario provided, the surpluses are calculated before and after the imposition of price controls which lead to changes in consumer and producer surplus and can result in deadweight loss.
Step-by-step explanation:
Understanding Consumer and Producer Surplus
The consumer surplus is the difference between what consumers are willing to pay for a good, based on their preferences, and the market equilibrium price. The producer surplus is the difference between the market price and the lowest price producers would be willing to accept, based on their costs. In the case of bottled water with Paolo as a seller and Kenji as a buyer, economic surpluses are calculated before and after market interventions such as price ceilings and price floors.
For example, if the equilibrium price of bottled water is $600 and quantity is 20,000, the imposition of a price ceiling at $400 reduces the quantity to 15,000. This change shifts the consumer surplus from T + U to T + V and the producer surplus from V + W + X to just X. Similarly, in a scenario where the equilibrium price is $8 at a quantity of 1,800, the imposition of a price floor at $12 decreases the quantity demanded to 1,400. As a consequence, the consumer surplus becomes just G and the producer surplus switches to H + I. These interventions often lead to a deadweight loss, indicating inefficiency and a loss in total surplus.