Welfare subsidizes a lower minimum wage

All of the welfare

Now that we can describe the welfare of consumers and producers, we are able to look at entire markets and so on total welfare to determine. Let us look at the market for any good. The market is in balance. The total welfare, i.e. the sum of producer surplus and consumer surplus, is shown.

Both rents are limited by the price and the demand curve as well as the supply curve.

Maximizing Welfare

Of particular interest is the question of whether this situation also includes the sum of pensions, i.e. the social Welfare, maximized. Let us assume that the state intervenes in price formation and determines a price that is below the equilibrium price. We will deal with government intervention in the next part. The example is only intended to serve as an illustration.

Maximizing Welfare

The two pensions are drawn again. The Producer surplus (yellow area) has fallen sharply because the companies offer less at the low price. On the one hand, you lose because of the lower price and, on the other hand, because of the smaller amount.
The Consumer rent (blue area) has increased overall. You gain part of the previous producer surplus. On the other hand, they lose a little again as a smaller amount is offered on the market.

If we compare this case with the normal equilibrium beforehand, we can determine from the areas that the sum of rents is decreasing. Both sides lose part of their pensions. This loss is shown in the graph as a red area.
The state intervention has to be one Decrease in welfare guided. If the goal was to increase welfare by keeping prices low for consumers, the goal has failed.
We come to a very similar result, albeit with reversed pensions, for a fixed price above the equilibrium price.

With this example we can state the following:
For one thing, goods and services are bought by those who value them the most.
On the other hand, the goods and services are produced by the firms that can produce them at the lowest cost. And finally, the interplay of supply and demand ensures that the sum of the pensions is maximized.

The bottom line at free play of market forces is (almost) always optimal for the society. There can of course also be cases of market failure. But we ignore them.