A Note on Equity and Efficiency in the Pricing of Local Telephone Services
Abstract
Since the publication of Bridger Mitchell's article on the Optimal Pricing of Local Telephone Service (1978), it has been assumed that social welfare can usually be increased by moving from a flat monthly rate for local calls to a two-part tariff with a price per call that is somewhat in excess of marginal cost. While a fixed monthly charge for local calls can be considered a regressive head tax (A. M. Henderson, 1947), it does not follow that a two-part tariff will resolve the equity problem. In this paper I use a simple diagram and a two-person revenuemaximizing formula to illustrate one of the more important limitations of usage-sensitive pricing. In the following analysis, it is assumed that there are two types of telephone users. The first type of consumer, D1, is assumed to have a net demand for calls or message units, represented by the linear equation:
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