Question

Explain how a two part-tariff works. Discuss its efficiency compared to other forms of pricing strategies, such as linear pricing or a fixed fee. What issues of equity may a two part-tariff introduce for vulnerable people? Is the net welfare effect of a two-part tariff positive or negative?

Answer 1

A two-part tariff is a division of pricing into two segments.

1. one-time acess fee right to buy a product(T)

2. per-unit price for each unit you consume. (P)

For example, we visit a fair the first we need to pay for the entry tickets, and then when we enter and try to purchase some product at that time we will pay the price of the at the product for each unit we consume/purchase. the first entry fee is considered as tax which we need to pay if we want to enter the fair. to access the or entry to the fair the send one depends on the customer.

2. When a customer pays the same price for each unit the seller is using "linear pricing". The linear pricing method is easier to manage to keep account of the no. of sale and the account of equal marginal profit.

A fixed cost pricing model is a model that guarantees a fixed budget for the project, it won't take the account of time period, and expenses. it allows the budget planner to add extra budget to meet any unwanted expenses.

comparing two par tariff with linear pricing and fixed fee it is like, the two-part tariff is the combination of both fixed fee (one-time fee T) and linear pricing as (unit price of the product per unit)

3. when we apply this two-part tariff to a vulnerable segment of the population it will work like a burden sum for them. they may want to access some product and they are capable to pay for that but due to the one time fee, which is too much for them, they stop themselves to consume that.

4. welfare aspect of two-part tariffs different from case to the case. if the category of the consumer are homogeneous then the consumer have a high surplus and the producer has the minimal. if the consumer is from the different group then there will be two possibilities a) p is high and T is low b) T is high and p is low. in this case the welfare depends on the producer's strategy as he can't provide both prices high so there is a reverse relation between price and fee. here if the price is high and tax is low then the producer will be benefited. if price is low and fee is high then the consumer benefited. the other way also the producer can offer the product along with the fee as bundle. that tis special case in two part tariff.