Peak Load Pricing in a Neoclassical Model with Bounds on Variable Input Utilization

Abstract

We modify the technological specification of the standard neoclassical model of peak load pricing by considering the case where the level of capital input bounds the set of feasible choices of the variable input. As compared to the conclusions of the standard neoclassical model, we find two basic changes. First, optimal capacity production is possible. Second, the optimal prices paid by peak (capacity) users and their optimal contributions to fixed costs may not be equal.