Question

a) Which price discrimination method would the monopoly prefer, first degree price discrimination or a two-part tariffs ? Explain why. (3p) (b) Is the market output Pareto efficient in first-degree price discrimination? Why/why not? Explain drawing a diagram. (2p) (c) True or false: A market cannot be Pareto efficient if the total consumers gains from trade is zero. Explain your answer.

Answer 1

a. Monopolist will prefer first degree price discrimination because the monopolist surplus is highest in that case.

Under first degree price discrimination, monopolist charges each consumer the highest amount they are willing to pay. so the profit is highest.

Under two part tariff, monopolist produces at less than efficient quantity, so the deadweight loss takes away the monopolist profit.

b. Yes, the first degree price discrimination outcome is pareto efficient as the monopolist produces at efficient level where Price equals marginal cost. Such that there is no Deadweight loss.

c. FALSE-

A market can be Pareto efficient when consumer surplus is zero given that deadweight loss is also zero. Even if the monopolist takes all the surplus, outcome can be pareto efficient.