Peak load pricing have the following disadvantages:ġ. It saves cost and adds to efficiency gain from peak load pricing. While choosing the scale of operation, when we turn from short-run to long-run, the electric supply company must keep in mind the capacity needed to meet the peak period demand. The efficiency gains from peak load pricing largely depend on the ability and willingness of electricity consumers to reduce its use in the peak-period.Ģ. Net gain occurs when electricity is used lesser in the peak-period and more in the off-peak period. It ensures efficient distribution of the use of electricity between the peak and off-peak periods. The advantages of peak load pricing are stated below:ġ. Advantages of Peak Load Pricing (Over Uniform Pricing): Consumers will make efforts to be more economical in their consumption of electricity in the peak period. Consumers will purchase OX 1 in the off-peak period. OP = This is the off-peak period pricing. With this price, consumers will purchase OX units in the peak hour. The traffic rush on roads is more after office hours. Demand for woolens is more in winter (peak period) and less in summer (off- peak period). Hotels at hill stations have peak period in summer and off-peak period in monsoon. When demand is more, it is called peak period, when less the off-peak period. Some examples are, electricity has different demand curves at different times during the day. This is a case of price discrimination peak and off-peak supplies at different prices. The monopolist always try to include as many assets in its capital base as possible in order to be able to sell at higher prices. In this situation, it is difficult to decide which pricing rule, the MC or the AC gives fair return on the monopolist’s capital investment. This will ensure normal profits to the monopolist or excess profit is zero. The other solution is to follow AC pricing rule and set the price at OP 1, where P = AC. The monopolist wills produce in the long-run if it is subsidized by the government out of general taxation. He incurs loss of CE per unit or total loss shown by the shaded rectangle ACEP. The monopolist sells OX units at price OP. In Figure 20 we see that the MC Price is OP which is determined by point E where P = MC. 19 explains an ease when MC pricing leads to losses. In that ease, the MC pricing can lead to losses to the monopolist. Since natural monopolies benefit from economies of scale, LMC is likely to be less than LAC in the relevant range of output. The monopolist will never increase output beyond X 2, in which case he would incur losses. Any wrong judgment will lead to long term inefficient allocation of resources and losses. The economist’s opinion differs regarding whether this return is a ‘fair’ return or not. The monopolist earns normal profits which are included in the cost structure. The monopolist sells OX 2 units of output at priceOP 2. The regulating authority can set an even lower price equal to AC rule i.e., P = AC. The profit earned is E 1A per unit or total profit shown by the shaded rectangle P 1E 1AB. The monopolist sells X 1 units at price P 1 and earns profit. The kink at point E 1 on the demand curve causes E 1M discontinuity or vertical section of the MR curve. MN corresponds to E 1d portion of the demand curve. P 1E 1 is the segment corresponding to P 1 E 1 portion of the demand curve. The corresponding marginal revenue curve is given by P 1E 1MN. The demand curve facing the monopolist has ‘a kink’ at point E due to MC pricing rule. The monopolist can sell any output up to X 1 at the regulated price of P 1 output greater than X 1 will be sold at declining prices as shown by E 1d portion of the demand curve. If the regulating authority decides to set the price of natural monopolies according to MC pricing i.e., where P = MC then it occurs at point E 1, the monopolist’s demand curve becomes P 1 E 1d. The objective of government is to set a maximum price below the monopoly price OP. The monopolist wants to sell OX units at price OP. It is given by OP price which is determined by point E where MR = MC. 19 illustrates the three pricing principles: the MC pricing, the AC pricing and the profit maximising pricing. The questions that arise are What should be the fair price of natural monopolies? Should it be equal to MC or AC? How can their prices be regulated?įig. This saves the consumers from having to pay high monopoly prices. Government and public authorities run these monopolies directly or impose price ceilings, which are not too low from monopoly price.
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