Welcome back to my blog! In the Previous blog, we talked about Externality, which including both positive externality and negative externality, and merit good, which defined as the good that has positive externalities associated with it. In this blog, we will firstly talk about demerit god.

Demerit goods can be defined as the good that has negative externalities associated with, and it will be over-consumed if left to market forces. For instance: Tobacco products, and high-fat, high- sugar food. These products will damage our physical health and very addictive, but these damage( or cost) will never be counted in the selling price. demerit goods are provided by the market but are likely to be under-priced and over-produced. As we can see from the first picture, if people consider the external cost, the supply curve should be S1 but not S.

There are serval ways to adjust these market failure. The first one should be laws and regulation. For example, if the government publish some regulations to control the supply of some demerit  goods, the supply will decrease to the correct level. Moreover, taxes can also be used to correct negative externalities. As you can see from the second picture, the supply cure will shift to left, which go back to the right place. Subsidy can be used to correct positive externalities. As you can see from the third picture, the increase in subsidy will cause the increase supply, thus the supply curve will shift to right. With the increase in quantity and the decrease in price, the supply and demand for merit goods will go back to the correct place.

After the introduction of externality, we will discuss the “price discrimination”.

Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to. (investopedia) There are three necessary conditions for charge a price discrimination.

Firstly, the product must have a downward-sloping demand curve, which represents this company have a strong market power.

Secondly, the company is able to readily identify buyers with predictably different demand curve. This means that the company know clearly the elasticity of their product and how they shift with different changes.

Thirdly, the company is able to prevent resale (aka arbitrage).

There’re several types of price discrimination. The first type is buying in bulk—the more you buy, the lower price you will get. The second type is named two-part tariff. For example, if you get a membership card for a supermarket, you will get lower price for its product. Another one is coupons. People who get promo code can buy the product in a lower price.

Through price discrimination, the company will absolutely maximize their revenue, because that contains the revenue from people who are willing to pay a higher price and revenue from people who can only pay a lower price. That successfully   instead the situation of a single price with a limited amount of people.