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Peak-Load Pricing: Charging More When Its Costs More To Produce

Peak-load pricing involves charging higher prices during times of peak demand when costs are highest to produce. This allows producers to earn supernormal profits from inelastic peak demand while consumers benefit from lower off-peak prices by shifting demand. However, some consumers may refuse higher peak prices and producers could exploit inelastic peak demand, though governments and stakeholders benefit from higher revenues overall.

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Minh Văn
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307 views7 pages

Peak-Load Pricing: Charging More When Its Costs More To Produce

Peak-load pricing involves charging higher prices during times of peak demand when costs are highest to produce. This allows producers to earn supernormal profits from inelastic peak demand while consumers benefit from lower off-peak prices by shifting demand. However, some consumers may refuse higher peak prices and producers could exploit inelastic peak demand, though governments and stakeholders benefit from higher revenues overall.

Uploaded by

Minh Văn
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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PEAK-LOAD PRICING

Charging more when its costs more to produce [Evaluation]

Advantages of Peak-load Pricing


To producer:

He can earn supernormal profits. He can tap into the elastic market along with the inelastic market situation during peak times. The average costs go down due to economies of scale.

To consumers:

They are charged lower prices during offpeak times. They can shift their demand to off-peak seasons and thus pay a lower price for the same good or service.

Disadvantages of Peak-load Pricing

If a uniform price is charged for all times, consumers usually buying during off-peak times would refuse to pay a higher price. Thus the producers would lose out on the elastic demand market. The consumers can be exploited by the producers during peak periods as the demand is inelastic and the consumer has no alternative.

Short Run

The producer earns supernormal profits in the short run though his marginal costs are relatively higher as output is high.

Long Run

The costs of production could decrease with change in technology, inventions etc. The producers would thus earn supernormal profits.

Stake holders

The government would enjoy higher revenue during peak periods. The stakeholders also benefit as they earn higher total revenue if they were to sell at a uniform price. During peak periods, the producers are the gainers while the consumers would lose out. During off-peak periods, the consumers benefit while the producers could be the losers.

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