Does consumer surplus over-weigh the interests of high-income consumers? An individual's willingness to pay for a good not only depends on how much they value that good, but also on their income level (at least under the conventional non-economics definition of the word 'value').

Consider the case with a single indivisible unit of a good and 2 consumers, a very wealthy consumer and a very poor consumer. Even if the poor consumer would benefit more from receiving the good than the wealthy consumer  (let's say the good is a drug that the poor consumer medically needs but the rich consumer wants to take recreationally), the 'efficiency-maximizing' free market will still give the good to the wealthy consumer under most conditions. The wealthier consumer has a higher willingness-to-pay not because the good is worth more to them, but because a single dollar of their wealth is worth less.

The normative idea that a good should always go to the individual with the highest willingness to pay is then surely flawed. The policy objective of maximizing surplus, which follows from this idea, must also be flawed. Given how glaring this problem is, I am surprised to see so many papers that still use WTP-derived consumer surplus in their normative analysis.

My questions are:

-What does the literature have to say about this issue?

-Have alternative measures of surplus been proposed?

-Is my reasoning flawed/is the measure of CS not as unfair as I am suggesting?

Partly inspired by some of the arguments in this thread:
What does economics say about &quot;price gouging&quot; during an emergency?
Consumer surplus in Microeconomics 101 is indeed often used in the way you describe and to illustrate a point about the allocation efficiency of a free market.

However, it is important to keep in mind the assumptions and limitations of the framework you describe.

First, the case you describe is a partial equilibrium case. This framework does not allow for such general statements as you are making about all goods always going to richer people. In partial equilibrium we look at one small market and forget about everything else. To use such a framework we must accept that it is reasonable for our question at hand to analyze one purchase in isolation. That assumption is clearly not reasonable for the question you have on all goods and as such the framework you describe cannot be used as it will lead to false conclusions.

With partial equilibrium we can look at this purchase in isolation from other markets. If income effects and the purchases in question are important then we cannot use the consumer surplus idea as done in Micro 101. Certainly this is an issue for the point you raise about all goods always going to a wealthier consumer. All goods cannot be analyzed with partial equilibrium.

The good allocation properties that economist often talk and that you mention about are based on general equilibrium and the proofs do not really involve the concept of consumer surplus.

To fully ensure avoidance of income issues, we often work with quasilinear utility functions when talking about consumer surplus and allocation, as you are doing. It is important, however, to keep in mind that these utility functions are special cases. They imply that income effects do not matter so they are widely used in Micro 101 for illustrative purposes.

Consumer surplus has a nice interpretation for quasilinear utility functions: it’s equal to the gain in utility. This makes quasilinear utility functions especially instructive. If everyone’s utility function has this form then the Pareto efficient allocations are exactly the allocations that maximize total consumer surplus (in the absence of production). 

So when using consumer surplus to talk about efficient allocation you need to accept the assumptions that go along with quasilinear utility. However, such utility function are only realistic for certain goods and certainly not for all goods.

Luckily, what you learned about free markets achieving allocation efficiency is still true even when considering more complex cases. However, these results are then true for different reasons and under different assumptions than what is taught through consumer surplus in introductory lessons.