The Mainstream Technique of Calculating Consumer and Producer “Surplus” Is Entirely Fallacious

All participants to voluntary exchange benefit; each values what he or she receives more than what he or she gives up. However, the mainstream technique of calculating consumer and producer “surplus” is entirely fallacious. In this approach, a consumer who would have been willing to pay up to, say, $10 for the first unit of a good, but only has to pay the market price of $5, is said to enjoy $5 of surplus on this first unit. The smaller surpluses on subsequent units are calculated and added together to reveal this consumer's total surplus. Yet this procedure assumes (a) that we can deduce information from individual's value scales that are not revealed in action, (b) that money is a stable measuring rod of subjective value, and (c) that it makes sense to add “units of utility” together. Other attempts at measuring psychic surpluses involve interpersonal utility comparisons, and thus involve yet another fallacy.

--Robert P. Murphy, Study Guide to Man, Economy, and State a Treatise on Economic Principles with Power and Market Government and the Economy (Auburn, AL: Ludwig von Mises Institute, 2006), 42-43.