A Simple Characterization of the Second‐best Two‐part and Block‐rate Tariffs Theory and Applications

Jörg Borrmann

Annals of Public and Cooperative Economics, 2003, vol. 74, issue 2, 205-228

Abstract: The general necessary optimality conditions for second‐best discrete multipart tariffs are rather complex. In this paper, we derive a simplified characterization of these conditions for two‐part tariffs and for block‐rate tariffs for given thresholds of these tariffs. The simplified necessary optimality conditions are equivalent to the necessary conditions for a Ramsey‐optimum for goods with continuously variable individually demanded quantities. We demonstrate that this characterization of second‐best multipart tariffs can be helpful, when applying the usual regulatory mechanisms to these tariffs. In particular, we consider Vogelsang–Finsinger (1979) regulation as well as a particular form of price‐cap regulation which is related to the Laspeyres index of prices.

Date: 2003
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