How does the introduction of a new good or service create value in terms of consumer surplus?

• A. By ensuring that all consumers pay exactly what they are willing to pay, leaving no surplus.
• B. By reducing the willingness to pay of all consumers for existing goods.
• C. By increasing the difference between what consumers are willing to pay and the market price, leading to higher consumer surplus.
• D. By eliminating consumer surplus entirely through perfect price discrimination.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of consumer surplus, which is the difference between the maximum price a consumer is willing to pay for a good or service and the actual market price they pay.
2. Step 2: Recognize that the introduction of a new good or service can increase consumer surplus by providing additional options that consumers value, potentially at prices lower than their willingness to pay.
3. Step 3: Analyze how this new good or service affects the market price and consumers' willingness to pay, noting that it can increase the gap between willingness to pay and price, thus increasing consumer surplus.
4. Step 4: Consider that the new good does not force all consumers to pay exactly their willingness to pay (which would eliminate surplus), nor does it reduce willingness to pay for existing goods necessarily; instead, it expands consumer choice and value.
5. Step 5: Conclude that the value created by the new good or service is reflected in the increased consumer surplus, as consumers gain more benefit from paying less than what they are willing to pay.