Koichiro Ito & Shuang Zhang
A central assumption in economics is that consumers properly distinguish fixed cost from variable cost. This assumption is fundamental to various economic theories, including optimal taxation, redistribution, and price discrimination. Using a quasi-experiment in heating price reform in China, we find empirical evidence that is inconsistent with this conventional assumption and more consistent with the “schmeduling” model in Liebman and Zeckhauser (2004). As we demonstrate the policy implications for two-part energy tariffs, this consumer behavior makes fixed cost directly relevant to the perceived relative prices of goods, and therefore alters the welfare implications of price, tax, and subsidy designs.
Areas of Focus: Energy Markets, Electric Power
Definition
Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Definition
Electric Power
As the electric power system faces new pressures and opportunities, EPIC research is working to identify the mix of policies needed to accelerate the global transition to clean, reliable, affordable...