Price Discrimination: Quantity discounts: buy one, get the second at half priceare an important form of price discrimination.

That a quantity discount is price discrimination is transparent from the fact that the units are sold at different prices. Consider a company that takes 24 individually wrapped rolls of paper towels and shrink-wraps the bundle at some modest expense. Each roll regularly sells for $2 and the company offers the valuepack for $24, or $1 per roll. Consumers with large families buy the value-pack, while consumers living in small apartments, driving small cars, or who use few paper towels do not. The effect of the value-pack is that it has offered a substantial discount to large family buyers, and large family buyers tend to be more price-sensitive, if only because they have more mouths to feed. The value-pack makes money for the seller because it offers a discount which is mostly chosen by the price-sensitive group. Coupons: It operates based on the value of time rather than the scale of demand. Individuals generally value their time at approximately their wages, so that people with low wages, who tend to be the most price-sensitive, also have the lowest value of time. Coupons, which are pieces of paper that grocery stores will redeem for fifty cents or a dollar off the price of an item, come in newspaper. A thrifty shopper may be able to spend an hour sorting through the coupons in the newspaper and save $20 on a $200 shopping expedition (the amount depends on the nature of the items the consumer purchasesbuying a lot of crackers, potato chips and paper towels increase the savings). This is a good deal for a consumer who values time at less than $20 per hour, and a bad deal for the consumer that values time in excess of $20 per hour. Thus, relatively poor consumers choose to use coupons, which permit the seller to have a price cut that is approximately targeted at the more price-sensitive group. Trade-in discounts: For example, a camera store may offer a $50 discount on the purchase price of a new camera for anyone who trades in an old camera. Individuals with old cameras are likely to have more elastic demands for new cameras than consumers with no cameras to trade in, because the old camera is likely to be a close substitute for a new camera. By offering trade-in discounts, retailers provide an incentive to their customers to group themselves according to their elasticity of demand.
Price Ceilings: Water in California

Let us begin the case of water with the agricultural industry, which consumes 80% to 85% of the water in California. For most of the twentieth century, the federal government has constructed and maintained water storage and delivery projects in the West. About 90% of this water is provided to agricultural users. Water is allocated to farmers who must either use their water allocation or lose the right to that water in the future (the so-called use-it-or-lose-it principle). Until very recently, farmers have not been allowed to sell their water to other users. Farmers in California typically pay $10 to $13 per acre-foot and sometimes as little as $5 per acre-foot, for irrigation water. (An acre foot is the amount of water to cover one acre of level land to a depth of one foot, 326,000 gallons.)

Since there has not been a functioning market, we cannot be sure what the equilibrium price would be. But we do know that California cities pay $200 to $500 per acre-foot for water. Thus, we can be sure that the $5-$13 per acre-foot paid by farmers is substantially below the equilibrium price. As you can imagine, the low price paid for water increases the quantity demanded greatly. Farmers have applied massive amounts of water to their lands. Water-intensive crops, such as rice, alfalfa, and cotton, are grown. These could never be profitable in an arid region like California without the artificially low price for water. These three crops, along with pasture, use 40% of Californias water but are low value crops (they provide only 0.2% of the total state income). The use of such large amounts of water has had serious effects on the soil quality of the San Joaquin Valley (due to the bringing of salts to the surface). From the earlier analysis, you can guess that the policy of low water prices brings about a shortage of water. Until the 1980s, Western agricultural interests were able to persuade the government to keep increasing the supply of water. Dam projects were built on nearly every major river in the West. In the 1980s, however, budget limitations forced the government to stop funding so many of these projects and people became more conscious of the environmental impacts of these projects. The result is that the shortage has become more obvious. Water issues have been major political issues in California.

Price Floors: Agricultural

The Great Depression of the 1930s led to a major federal role in agriculture. The Depression affected the entire economy, but it hit farmers particularly hard. Prices received by farmers plunged nearly two-thirds from 1930 to 1933. Many farmers had a tough time keeping up mortgage payments. By 1932, more than half of all farm loans were in default. Farm legislation passed during the Great Depression has been modified many times, but the federal government has continued its direct involvement in agricultural markets. This has meant a variety of government programs that guarantee a minimum price for some types of agricultural products. These programs have been accompanied by government purchases of any surplus, by requirements to restrict acreage in order to limit those surpluses, by crop or production restrictions, and the like.

For Example: price floors in Wheat Markets. At PF, W2 bushels of wheat will be supplied. With that much wheat on the market, there is market pressure on the price of wheat to fall. To prevent price from falling, the government buys the surplus of (W2 - W1) bushels of wheat, so that only W1 bushels are actually available to private consumers for purchase on the market. The government can store the surpluses or find special uses for them. For example, surpluses generated in the United States have been shipped to developing countries as grants-in-aid or distributed to local school lunch programs. As a variation on this program, the government can require farmers who want to participate in the price support program to reduce acreage in order to limit the size of the surpluses. After 1973, the government stopped buying the surpluses (with some exceptions) and simply guaranteed farmers a target price. If the average market price for a crop fell below the crops target price, the government paid the difference. If, for example, a crop had a market price of $3 per unit and a target price of $4 per unit, the government would give farmers a payment of $1 for each unit sold. Farmers would thus receive the market price of $3 plus a government payment of $1 per unit. For farmers to receive these payments, they had to agree to remove acres from production and to comply with certain conservation provisions. These restrictions sought to reduce the size of the surplus generated by the target price, which acted as a kind of price floor.