If a market is controlled by one perfect price discriminator who is able to charge each consumer the highest price that consumer is willing to pay, the seller will produce output until the price paid by the last consumer is equal to the marginal cost of making the good. That is, the price of the last good equals the marginal cost of making the good. If welfare is measured as consumer surplus plus

Question

producer surplus, compare this market structure to a competitive market in terms of efficiency and equity.

What will be an ideal response?

Answer 1

A perfect price discriminator is Pareto efficient. Producer surplus plus consumer surplus is the same as in a competitive market. From an equity standpoint, however, there is much less equity than in a competitive market. A perfect price discriminator can capture all of the consumer surplus for herself, leaving consumer surplus equal to zero.