Introduction

In the previous chapter we developed the major theme of second-best pricing: to cover total costs of the regulated firm with minimum deadweight loss. The term Ramsey prices was used to refer to the set of uniform prices which maximize total surplus - minimizing deadweight loss - subject to the breakeven constraint. Ramsey prices do this by charging different prices to the regulated firm's various markets with the aim of generating the largest amounts of contribution from markets in which a high markup of price over marginal cost will perturb consumption levels least from what would be achieved with full marginal cost pricing. In this chapter we will broaden the analysis to include price structures which permit us to vary prices not only between markets, but also between consumers in the same market.

The device for doing this is called the nonuniform price schedule. A nonuniform price schedule is a tariff for one or more goods in which the consumer's total outlay does not simply rise proportionately with the amounts of the goods he purchases; quantity discounts and quantity premia are permitted. Analogously, we call a tariff a uniform price schedule when total outlay is simply proportional to the amount purchased. Thus, Ramsey prices are the uniform prices which maximize total surplus subject to the constraint that the regulated firm break even. An example of a nonuniform price schedule is given in Figure 4.1, where we depict total outlay per month at different consumption levels under a residential electricity tariff used by the Commonwealth Edison Company in 1976.