Peak-load pricing with stochastic demand
Abstract
A peak-load model using two rationing schemes analyzes peak-load pricing under conditions of uncertainty and the appropriateness and equity of charging different prices to consumers. Two major points are made. First, with realistic rationing schemes and multiplicative demand, operating policies that maximize surplus to society are found to involve nonnegative profits and a price above long-run marginal costs in contrast to previous findings. For many situations, multiplicative demand uncertainty seems more relevant than additive uncertainty. If a competitive market is possible, then competition, perhaps with taxation, can achieve the social optimum. The second point emphasizes that using expected surplus as welfare function and charging the same price to all consumers may both be undesirable. The probability of obtaining a good is a characteristic of the good for which consumers have preference. 5 references.
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