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Discuss Price Discrimination and Deadweight Loss

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Discuss price discrimination and deadweight loss(example of single price monopoly)

Price discrimination is the business practice of selling the same good at different prices to different customers. Price discrimination is not possible when a good is sold in a competitive market. Price discrimination is a rational strategy for a profit-maximizing monopolist. It requires the ability to separate customers according to their willingness to pay. Price discrimination can also raise economic welfare. A perfect price discrimination describes a situation in which the monopolist knows exactly each customer’s willingness to pay and can charge each customer a different price. Deadweight loss measures the inefficiency caused from a market distortion, such as a tax levied on an item. It can be measured by the sum total of both the producer and consumer surpluses. The inefficiency of monopoly can be measured with a deadweight loss triangle. The deadweight loss is represented by the area of the triangle between the demand curve, which reflects the value of the good to consumers and the marginal-cost curve, which reflects the costs of the monopoly producer. The deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax. A single price monopoly is a monopoly that charges the same price to all buyers for each and every unit of output produced. An example of single price monopoly is the water company. They charge a specific amount for the water being used by the tenants. Lets say the water company charges $1 per gallon used to each customer who use that company. Each customer pays the set amount so it’s up to them to decide how to save water or whether to use a lot and pay more money.

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