The per capita consumption of fresh milk has been declining steadily because of increasing substitution. The price discrimination scheme employed in the fresh milk industry is analysed using a demand and supply model. Prices are shown to have set well above the free market price, inducing an estimated cutback in consumption of 8 to 10 per cent and an increase in production of 2 to 4,5 per cent, resulting in an average surplus of 13,5 per cent of fresh milk sales. The transfer from consumers to producers is estimated at between 12,7 and 17,1 per cent of the value of fresh milk production. Approximately half of this transfer is absorbed by the Dairy Board as levies and occurs at a social cost. Price discrimination may be to the detriment of producers in the long term as artificially high prices may encourage the possible irreversible consumption of substitutes.