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Effects of Price Discrimination on Social Welfare

Here we understand about What is Price Discrimination and its effects on social welfare in detailed.

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Effects of Price Discrimination on Social Welfare
First, we will understand the meaning of Price Discrimination:
"Price Discrimination refers to the act of charging different units of a commodity, though all these units are in fact identical so far their physical characteristics are concerned."
Now, we will discuss about its effects in detailed.
Effects of Price Discrimination:
"Price Discrimination " is justified or not depends on its economic effects on society. Price discrimination may bring benefits to the customers and to the society.
  1. Making Production Possible: There are certain products or services whose prices, if kept at a high level, would be available only to the richer section of the society. In that case, the total sales may not be large and the sale proceeds may not be sufficient to cover the total cost of production. If a lower price is charged in order that the poorer section of the society may get the benefit of such services, the sales will, of course, increase but the sale proceeds at such a low price may not cover the total cost of production. Under such circumstances, the commodity or the service may not be produced at all. If price discrimination is practiced, the producer may charge a higher price from the rich and a lower price from the poor. Total sale proceeds may then cover the total expenses of production. According to Professor Mr. Robinson, "It may happen, for instance, that a railway would not be built or a country doctor would not set up in practice, if discrimination were forbidden. It clearly indicates that price discrimination should be permitted in such cases."
  2. Economic Equality: Price discrimination is not socially justifiable under the following circumstances- when price discrimination is practiced, the monopolist charges a higher price to one group of buyers and a lower price to another group of buyers. The first group will that lose while the second group will gain. Now, if the buyers from whom a high price is charged belong to the richer section of the society and those from whom a low price is charged belong to the poorer section of the society, the gain to the poorer section will far outweight the loss to the richer classes. Therefore, in accordance with the principle of economic equality and social justice and the community as a whole with benefit from such price discrimination.
  3. Larger Production: Price discrimination result in larger production than under simple monopoly, it is to the advantage of the society because larger production implies greater economic welfare.
However, price discrimination is not socially justifiable under the following circumstances-
  1. In favour of the Rich: When price discrimination is resorted in favour of rich and against poor people, by charging low price from the former and high price from the latter, then price discrimination will reduce social welfare. Same way, in dumping under which high price is charged to the buyers in home market, while low price is charged for the same product to the buyers in foreign market. Thus, dumping is against national interest.
  2. Exploitation of Buyers: Here, if to maximise personal profits, a monopolist takes undue advantage of his monopoly power, divides market and exploits a group of buyers whose demand for the monopolist's product is inelastic, price discrimination is to be condemned.
  3. Uneconomic use of the commodity: The degree of scarcity of a commodity is reflected in the level of its market price. If supply is limited, market price will be high and people will be induced to use the commodity most economically. But if different prices are charged then the commodity will not be economically used by those buyers to whom lower prices is charged. These buyers may use the commodity in less important directions, because it is available to them at a low price. According to Professor Mrs. Joan Robinson, "From the point of view of society as whole, it is impossible to say price discrimination is desirable or not, it leads to an increase in output. Also leads to maldistribution of resources as between different uses. It is necessary to weight up the benefit from the increase in output against this disadvantage."
What is Price Discrimination?
Effects of Price Discrimination on Social Welfare
Making Production Possible
Economic Equality
Larger Production
Price Discrimination- Effects of Price Discrimination of Social Welfare.
Tech writer at NewsandStory