Question

Explain why first -degree price discrimination creates an economically efficient outcome, i.e. with deadweight (DWL) loss of zero.

Answer 1

It happens because the 1^st degree price discrimination acts like a perfect completion, where equilibrium is at the equality of price (P) and marginal cost (MC); symbolically, (P = MC).

In case of 1^st degree price discrimination, consumers are charged differently based on their willingness-to-pay; this reflects no surplus for consumers and all those surpluses already captured by the monopolist (supplier). It actually transfers the surplus from consumers to supplier, which doesn’t indicate a loss since atleast someone enjoying that surplus; therefore, there is no deadweight loss (DWL).