How Firms Try to Extract Consumer Surplus Using Two-Part Tariffs Essay

How Firms Try to Extract Consumer Surplus Using Two-Part Tariffs - Essay Example This study declares that consumer surplus may be defined as â€Å"The difference between the price that a consumer is willing to pay for a good and the amount actually paid†. A two-part tariff (TPT) has many interpretations, one of which is: â€Å"A form of pricing in which consumers are charged both an entry and a usage fee† (ibid, 317). There is more to two-part tariffs than described. It is essential to understand certain associated economic factors before getting at the rather complex topic. In this paper, I will explain in brief Consumer Surplus; Consumer Surplus and Demand; Monopoly and Pricing Strategies with Market Power. Two-part tariffs and consumer surplus are closely linked; I will explain what two-part tariff means in practical terms and show how firms try to extract consumer surplus using it. This paper highlights the public purchases goods only if there is some benefit to be had. Consumer surplus is a valuation of how much benefit individuals gain as a total on completing their purchase of the product in question. Most people have differing methods of evaluating the intrinsic value of a good. Such extraneous factors, apart from purely commercial reasons, decide for these individuals the maximum price they are willing to fork out for an item. If an individual is willing to pay  £ 100 for a Liverpool vs Chelsea soccer match, but manages a ticket for  £ 40; his consumer surplus is  £ 60. According to Pindyk, Rubinfeld and Mehta, â€Å"A demand curve is the relationship between the quantity of a good consumers are willing to buy and the price of that good.† They add, â€Å"It is fairly simple to calculate consumer surplus if the corresponding demand curve is known and their relationship can be examined†. Let us do so for an individual, as advised by the a uthors.