Problems of Implementation

Abstract

It will be appreciated that tariffs based on the preceding analysis could be exceedingly complex. Their rates may be required to vary between different time periods, different geographical areas, and different consumers within any area and time period according to their demand characteristics. If these tariffs were so complex that consumers could not understand them, then the signalling function of the price system would fail and the whole point of having a tariff based on marginal costs would be lost. Thus, in the design of any actual tariff, particular attention must be paid to the ease with which a customer may understand it. This consideration, and the need for simplification, is likely to be the more important the smaller is any customer’s consumption of the product in question per period. To illustrate, as is explained in Chapter 9, in England and Wales the Central Electricity Generating Board uses a relatively sophisticated tariff for its sales to the twelve Area Boards which make the final retail sales. However, when these Boards sell to domestic consumers they tend to use relatively simple tariffs. This is partly because, for these small consumers, the administrative costs associated with more complex tariffs more than outweigh the potential benefits stemming from their use, and this is an issue which we consider in more detail below.