Differential Pricing and Interconsumer Efficiency in the Electric Power Industry

Abstract

As a means of avoiding the allocative distortions which might arise from pricing uniformly all units of output, industries in the regulated sector commonly utilize a variety of differential pricing practices. This paper presents empirical evidence indicating that one variant of differential pricing used in the electric power industry in itself gives rise to substantial allocative inefficiency. This finding suggests that the welfare consequences of differential pricing be examined more carefully.