A company creates a radio program that can be made excludable, meaning they can charge listeners for access. The cost to broadcast the program to one additional listener is zero. The company finds that the socially optimal number of listeners (where total welfare is maximized) is 10,000. However, to generate revenue, they set a price that results in only 6,000 listeners. Which of the following statements best analyzes the difference between these two outcomes?

Pricing Strategy for a Digital Product

Analyzing Inefficiency in Excludable Goods

A company offers a streaming music program that is excludable, but the marginal cost of adding a new listener is zero. The market demand for the program is represented by the equation P = 15 - 0.0015Q, where P is the price in dollars and Q is the number of listeners. To generate revenue, the company sets a price of $6 per listener. What is the value of the total economic surplus that is lost because the price is set at $6 instead of the socially efficient price?

Consider a market for a digital good that is excludable (access can be restricted) but has a marginal cost of zero for each additional user. The market is represented by a standard downward-sloping demand curve on a price-quantity graph. The company sets a price, P₁, which is above zero. At this price, the quantity demanded is Q₁. The point on the demand curve corresponding to this price and quantity is Point B. The demand curve intersects the price axis at Point A and the quantity axis at Point C. Match each economic concept with the geometric area that represents it in this scenario.

A company provides an excludable digital music service where the cost of adding one more listener is zero. The company sets a price of $6, which results in fewer listeners than the socially optimal level. The deadweight loss in this situation is created because the consumers who pay the $6 price are paying more than the marginal cost of the service.

Evaluating Pricing Strategies for Digital Goods

A company provides an excludable digital music service where the cost of adding one more listener is zero. The market demand is linear. At the socially efficient quantity of 10,000 listeners, the price would be $0. The company decides to charge a price of $6, which reduces the number of listeners to 6,000. The value of the total economic surplus lost due to this pricing decision is $______. (Enter a number only, without commas or symbols).

A company provides an excludable digital service for which the cost of adding one more user is zero. To generate revenue, the company sets a price above zero. Arrange the following statements to describe the logical sequence of economic effects that results from this pricing decision.

Evaluating a Subsidy to Correct Market Inefficiency

Composition of Social Benefit with Private Provision of Min's Music