Metering Costs and Marginal Cost Pricing in Public Utilities

This paper examines a welfare criterion for marginal cost pricing in the presence of metering costs. The good examined is local telephone service, which is viewed as two separate commodities: a connection to the system, and a charge for the telephone services actually used. The empirical results suggest that the rate structures of North American telephone utilities appear more consistent with rational pricing in the face of metering costs than with Averch-Johnson behavior.