Question

An increasing number of charities have turned to online auctions as a way to raise money by selling unique experiences donated by celebrities (such as a meet-and-greet with a celebrity before a concert or a walk-on role on a television show). Why would the use of auctions lead to a better outcome for the charity as opposed to just setting a fixed price? Explain using the concepts of consumer surplus and producer surplus.

Answer 1

Consumers establish the prices which they are willing to pay at auctions and the price which they are willing to pay may be higher than the fixed price.

Explanation:

Fixing the price in the case of an auction will only lead to the paying of a particular price by the consumers or the volunteer people who are willing to pay at the charity for any of the social services.

But in the case when the prices are not fixed, then in that case there is auction in the charity events and it turns out to be better than the fixing of the prices. The reason for this is that the volunteers or the consumers may pay higher prices for the charity than the fixed prices which serves the purpose even better for raising money for the charity.