On the Inefficiency of Two-Part Tariffs.

The partial equilibrium literature on two-part tariffs suggests that if a commodity is produced under increasing returns, efficiency can be achieved through marginal cost pricing and a suitable choice of "entry fees" (fixed charge) that may vary from consumer to consumer. The author shows this partial equilibrium intuition cannot be extended beyond some special cases. Even with a consumer-specific fixed charge, it is possible that none of the equilibria yield Pareto efficiency. Furthermore, it may be impossible to achieve Pareto efficiency through any specification of taxes that are levied solely to cover losses. Copyright 1990 by The Review of Economic Studies Limited.