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  5. Do Consumers Distinguish Fixed Cost from Variable Cost? “Schmeduling” in Two-Part Tariffs in Energy

American Economic Journal:
Economic Policy

ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)

Do Consumers Distinguish Fixed Cost from Variable Cost? “Schmeduling” in Two-Part Tariffs in Energy

  • Koichiro Ito
  • Shuang Zhang
American Economic Journal: Economic Policy (Forthcoming)

Abstract

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 its policy implications for two-part energy tariffs, this schmeduling behavior makes fixed costs directly relevant to the perceived relative prices of goods, and therefore alters the welfare implications of price, tax, and subsidy designs.

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