Two-part tariff: Difference between revisions

Revision as of 09:59, 29 October 2013

Revision as of 07:07, 22 November 2014

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[[Image:TwoPartTariffHomogDemandNAX.svg|right|thumb|300px|A demonstration of a two-part tariff when demand is homogeneous; the diagram applies for each consumer]]

When consumers have homogeneous demand, any one consumer is representative of the market (the market being n identical consumers). For purposes of demonstration, consider just one consumer who interacts with one firm which experiences no fixed costs and constant costs per unit - hence the horizontal [[marginal cost]] (MC) line.

Recall that the demand curve represents our consumer’s maximum willingness to pay for any given output. Thus, as long as he receives an appropriate amount of goods, such as Qc, then he will be willing to pay his entire surplus (ABC) in addition to the cost per unit under [[perfect competition]] (Pc by Qc) - i.e. the entire area under the demand curve up to point Qc.