Price Discrimination and Efficiency

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Arsène Jules Étienne Dupuit’s Price Discrimination Model:

Consider a bridge with a high fixed cost.  Once built, the marginal cost of using it is zero.  Thus, to equate marginal social benefit and marginal cost, the optimal price for the last person interested in crossing the bridge is zero (point a in the figure below).

To deal with the problems of public goods, government could charge a much higher rate to people who place greater satisfaction than on those who do not. This use of a “benefit principle of taxation” is effectively an example of price discrimination.

A monopolist might theoretically practice perfect price discrimination – extracting every cent that the highest voluntary bidders would be willing to pay for each possible unit of a good. This might be efficient, but is it fair? à It turns social welfare loss (dead-weight loss) from non-discriminatory monopoly pricing into pure profit.

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Author: Ralph Byrns

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