Two-part marginal cost pricing equilibria: Existence and efficiency

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Abstract

Two-part tariffs are explored in a general equilibrium model with increasing returns to scale. Two-part marginal cost pricing equilibria are not generally Paretoefficient. The Second Fundamental Theorem of Welfare Economics may also fail. We introduce a notion of consumer surplus as the willingness to pay for access to the increasing returns good. The individuals's hookup charge is set to a fixed fraction of his consumer surplus. If aggregate consumer surplus exceeds the losses of the regulated monopoly, then exact two-part marginal cost pricing equilibria exist. Further, for efficient allocations having positive net surplus, the Second Fundamental Theorem of Welfare Economics holds. © 1992 Academic Press, Inc.

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Brown, D. J., Heller, W. P., & Starr, R. M. (1992). Two-part marginal cost pricing equilibria: Existence and efficiency. Journal of Economic Theory, 57(1), 52–72. https://doi.org/10.1016/S0022-0531(05)80040-7

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