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8 Efficient Pricing of Electricity > Ramsey Pricing--The Second-Best Option - Pg. 243

Ramsey Pricing--The Second-Best Option and c 2 = $0:02: Also note that the marginal cost of electricity is much less expensive in the off-peak period, which is not surprising. Why? The firm's objective then is to earn total revenue (TR) so that total costs (TC) are covered, which implies that TR = TC: More specifically, TR = P 1 ð720 - 4000*P 1 Þ + P 2 ð180 - 1000*P 2 Þ and TC = $0:09*ð720 - 4000*P 1 Þ + $0:02*ð180 - 1000*P 2 Þ + 2:00 (8.10) (8.9) 243 In this example, several pairs of prices satisfy the firm's breakeven constraint and the objective then becomes to find that pair that yields the lowest dead-weight loss, which, according to Brown and Sibley (1986), is that P 1 = $0.09 (equivalent to marginal cost) and P 2 = $0.034 (above marginal cost); in essence, the off-peak users absorb the entire fixed cost. Does this appear to be an efficient outcome? Why or why not? (As an exercise, you will show that this minimizes dead-weight loss and, as such, is the most efficient outcome.)