Panera Bakery has opened a non-profit pay-what-you-want shop in an upscale St. Louis suburb. This is surely a form of (voluntary) price discrimination, where everyone pays an amount that reflects the value to them of the marginal croissant or sandwich.
It almost certainly erodes both consumer and producer surplus, economists' measure of welfare obtained from competitive markets. If consumers consistently "cheat" in the amount they pay, it could be output reducing (assuming an upwardly sloping supply curve) or could alter the output mix.
In an ideal world, the value of the lost consumer surplus would exactly balance the lost producer surplus for the units provided at below marginal cost "prices." In other words, the amount paid by those who value the product more at the margin will in effect be transferred to those who value the product less at the margin (at least as revealed by the price they pay). In this case, level and mix of output should be the same as in a competitive market (I think).
I can think of several reasons why someone might offer a low price: 1) they can't afford to pay more, but would benefit nutritionally and psychologically by more than or at least as much as the price they can afford to offer; 2) they can afford more, but do not value the sandwich enough to pay a higher price; or 3) they can afford to pay more, their valuation of the sandwich is high (say above marginal cost), but they prefer to cheat and pay less than their actual valuation of the sandwich.
Assuming the store can stay in business without altering product mix or output, will there be a welfare loss or a welfare gain? How will the mix of 1's, 2's, and 3's affect your answer? How might social norms or an inner moral compass affect the outcome of this experiment? Is there any way to "police" cheaters while maintaining the spirit of the experiment? Under what conditions is this pricing mechanism Pareto efficient?
You won't be graded.