Non-linear Prices

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Another approach to economic pricing is non-linear pricing1. Non-linear prices are prices that vary depending on the amount of consumption by the customer. An example might be a water tariff, which has higher per gallon or per liter prices for higher levels of consumption than for lower levels of consumption. Non-linear prices are like multi-part prices in that they allow the operator to charge prices at the margin that reflect marginal cost, while using the inframarginal prices to manage earnings. Inframarginal prices are the prices charged for units that are not at the margin. For example, if a consumer purchases 1000 liters of water, the price paid for the 1000th unit is the marginal price and the prices charged for the other 999 liters are the inframarginal prices. Non-linear prices may be used in conjunction with multi-part tariffs. Non-linear prices represent another situation where the interest of the operator and the interest of the government coincide.

Footnotes

  1. See the reference section for Principles, Options, and Considerations in Rate Design and the reference section for Economics of Alternative Price Structures.