Question

What is first-degree price discrimination? Is the outcome under perfect price discrimination allocatively and productively efficient? How does your answer change if the monopolist cannot price discriminate?

Answer 1

First-degree price discrimination, which is also known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed . The firm has the knowledge of every consumer's reservation price and hence charges accordingly . The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself . So there is no consumer surplus , the total surplus is equal to producer surplus .

The perfectly price discriminating monopolist will be allocatively efficient because the last unit sold will have a price equal to marginal cost , it is the consumer with lowest reservation price .

Yes it is productively efficient also as there is no dead weight loss , the units produced upto P=MC .

If monopolist cannot price discriminate then there will be inefficiency as monopoly output is lower and price is higher than perfect competition . There is dead weight loss .