Question

This problem relates to the Belgian electricity regulation commission. All monetary amounts are in Belgian francs (BF). Given the huge fixed costs faced by the government-owned Belgian electric power utilities, the commission decided to charge a uniform price of 4.810BF/kWh, far in excess of the marginal cost of l BF/kWh. Then someone suggested that the government could make everyone better off -- small customers, large customers, the government -- by offering consumers a choice of two tariffs. Customers could either choose the above uniform price policy or they could choose a two-part tariff with a 1,173BF subscription fee per year and a unit price of 2.752BF/kWh. Show how this suggestion might achieve what it claims to achieve. What is a necessary condition for the proposal to work?

Answer 1

The suggestion tobcharge a two part tariff will only work for citizens whose electricity consumption is atleast minimum determined level below which they would be at loss if they opt for the two part tariff scheme.

Below is the actual calculation for the necessary condition for the proposal to work. The necessary condition is the consumption of minimum electricity to opt for two part tariff scheme.

Uniform price = 4.81 BF/KWH

Subscription fee per year = 1173 BF

Unit price of two part tariff = 2.752 BF/KWH

Let us assume that electricity consumption is E units.

Total cost for earlier tariff = Total cost for two part tariff

E*uniform price = subscription fee per year + E*unit price

E*4.81 = 1173 + 2.752*E

E*(4.81-2.752) = 1173

E*2.058 = 1173

E = 570 KWH

Hence minimum electricity coyin order to opt for two part tariff scheme is 570 KWH. This is the necessary condition for the proposal to work.