A pilot for a private jet stops for refueling in Omaha, Nebraska. Topper Fuels offers him a case of French wine to refuel with them (a total retail value of $324 to the pilot). For refueling, inspections, and minor repairs, Topper charges $2,700, $400 more than the least expensive fuel company. What has happened to the company that owns the private jet?
What will be an ideal response?
This is an example of an incentive conflict that arises because of asymmetric information. The owner of the private jet knows much less about the price of refueling in this market than the pilot. The pilot can take advantage of this asymmetric information to pick the refueling company that offers the pilot, and not the owner of the private jet, the best deal. The combined welfare of the pilot and the owner of the private jet is lower by $76.While the pilot is better off by $324, the price of the wine, the owner of the jet is worse off by $400.
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