“The Fox Cabaret” is a popular Vancouver nightclub. It has adopted the following pricing policy. To enter the club on a Friday or Saturday evening, you pay a cover charge of $10. When you enter the club you then pay $9 for each alcoholic beverage you consume. Explain the logic of this pricing system from an economic perspective. In other words, why is “The Fox Cabaret” doing this?
Answer - The club must have implemeted this policy in order to reduce the chances of the free rider problem. This is necessary so that the people in the interest of seeing the club , may enter and then go out without consuming anything and will not have to pay any charges. This will lead to the problem of free rider and will cause the inefficiency. Hence the club imposed the deductibles which will impose an initial charge upon the customers in the entry and thus , control the number of people entering.
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