Question

1. A) Provide a graphical illustration and interpretation of peak load pricing when there are two classes of visitors to Lory State Park (say high season and low season visitors). B) Discuss two policy alternatives available to manage visitors when demand can exceed capacity at times, but not always. C) Demonstrate graphically when the alternative results in (short term, seasonal) profits to the park. D) What might be done if the Park Service is a nonprofit government agency?

Answer 1

1. A) Price charged during peak season is higher than the price charged during low season, when peak load pricing strategy is undertaken. As demand is very high during peak season, a higher price is charged compared to low season. The park faces the demand curve AR₁ during peak season and AR₂ during lean season. Marginal cost is high during peak season as load of visitors is high. As the capacity of the park is limited, the management raises the price to P1 as shown in the diagram to manage the pressure of the visitors. Hence, revenue is also higher. On the other hand, during low season, the demand is very low and hence, MC is also low. In order to attract visitors, firm lowers the price to P2.

b. When there is excess demand, the possible policy alternatives are

i) the management can impose extra charge for parking and rides in the form of surcharge so that some visitors can be discouraged.

ii) Online pricing can be charged rather than on booking through counters. Through online booking, the number of visitors can be limited by announcing specific number of tickets and offering limited number of tickets to enter into the park during peak season.

c) During peak season, when surcharge is used, the price is hiked when the demand exceeds the capacity of the firm. In diagram, the maximum capacity of a firm for P1 is Q1. Firm may charge extra charge per unit beyond Q1 to discourage excess visitors if the demand curve becomes AR₂ from AR₁. Excess pricing can bring extra profit to the firms.

d) If the park is a non profit government agencies, excess demand may result into poor service and less efficient services in the absence of profit policies. Park management can set some rules in terms of visit timing, environmental policy. Therefore, price can be charged for environmental issues, to the visitors breaking park rules. During a specific time of Day time, a minimum price can be charged so that the number of free riders can be reduced.