The optional tariff1 is closely related to the multi-part tariff. Under optional tariffs, the operator offers the customer a menu of pricing plans.2 The customer chooses the pricing plan that best fits the customer’s consumption preferences and pays according to that plan. If properly designed, the optional tariff scheme is profit maximizing for the operator and makes customers better off. Most optional tariffs include multi-part pricing. Fortunately, multi-part tariffs and optional tariffs are situations where the operator’s interests and the government’s interest often coincide. Multi-part tariffs provide greater welfare than linear tariffs when the linear price does not equal marginal cost. Optional tariffs make customers better off than single tariffs because customers can choose the tariff that best meets their needs.
- See the reference section for Principles, Options, and Considerations in Rate Design and the reference section for Economics of Alternative Price Structures.
- The economics of offering a customer a menu of tariffs is related to the economics of offering an operator a menu of incentive regulation plans. Readers interested in the underlying economics could read more technical economics texts on these issues, such as Laffont, Jean-Jacques, and Jean Tirole, A Theory of Incentives in Procurement and Regulation, Cambridge, Massachusetts: The MIT Press, 1993.