Two Part Tariff

Two Part Tariff

Two-part Tariff, a price in two parts, frequently found in the charges made by public service undertakings supplying electricity, gas and telephones. The essence of a two-part tariff is that the consumer pays a fixed charge and a charge varying directly with the quantity of the service consumed; thus, the Post Office charges both a quarterly rental for the use of a telephone irrespective of the number of calls and a price for each call.

This method of charging is used by undertakings which require considerable plant and equipment with high costs of installation and maintenance. The demand for the services fluctuates over the day, the week or the season, with periods of concentration at peak hours. Since they cannot (except gas) be stored, the plant and equipment must be large enough to cope with peak demands. At other times the undertaking will be working at less than full capacity. Costs of supplying additional units of the service are considerably higher at the peaks than at slack periods. The fixed costs of the undertaking are related to the amount the consumer takes at the peaks, and are allocated in the form of fixed charges (rentals) to consumers. The charge per unit of the service consumed covers its direct or prime costs (the materials employed in producing it).

Two-part tariffs aim to cover fixed costs while keeping the charge for additional units of service low, thus encouraging maximum use of equipment and spreading fixed costs. A single price would result in a lower output and possibly a loss. An alternative to a two-part tariff would be to charge discriminating prices on the principle of 'what the traffic will bear' to different consumers, in order to cover fixed costs and encourage consumption. Similarly, the fixed charge in a two-part tariff can differ for different users. To this extent the two-part tariff is also a form of discriminatory pricing the purpose of which is to spread overhead costs and promote the most extensive use of the service.

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