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On the Inefficiency of Two-Part Tariffs

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  • Rajiv Vohra

Abstract

The partial equilibrium literature on two-part tariffs suggests that if a commodity is produced under increasing returns, efficiency can be achieved through marginal cost pricing and a suitable choice of "entry fees" (fixed charge) which may vary from consumer to consumer. We show that this partial equilibrium intuition cannot be extended beyond some special cases. Even with a consumer-specific fixed charge, it is possible that none of the equilibria yield Pareto efficiency. Furthermore, it may be impossible to achieve Pareto efficiency through any specification of taxes which are levied solely to cover losses.

Suggested Citation

  • Rajiv Vohra, 1990. "On the Inefficiency of Two-Part Tariffs," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 415-438.
  • Handle: RePEc:oup:restud:v:57:y:1990:i:3:p:415-438.
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    File URL: http://hdl.handle.net/10.2307/2298022
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    Cited by:

    1. Yin, Xiangkang, 2004. "Two-part tariff competition in duopoly," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 799-820, June.
    2. John P. Conley & Myrna Wooders, 1998. "Anonymous Lindahl Pricing in a Tiebout Economy with Crowding Types," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 952-974, November.
    3. Antonio Villar Notario, 2000. "On The Efficiency Of Market Equilibrium In Production Economies," Working Papers. Serie AD 2000-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Brown, Donald J. & Heller, Walter P. & Starr, Ross M., 1992. "Two-part marginal cost pricing equilibria: Existence and efficiency," Journal of Economic Theory, Elsevier, vol. 57(1), pages 52-72.

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