Working Paper: NBER ID: w26853
Authors: Koichiro Ito; Shuang Zhang
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 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.
Keywords: fixed cost; variable cost; two-part tariffs; energy pricing; consumer behavior
JEL Codes: L38; L51; L97; O1; O38; O44; Q4; Q41; Q5; Q53; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misperception of prices (P22) | increase in heating usage (Q41) |
| CBB reform (E69) | ambiguous welfare implications (D69) |
| CBB reform (E69) | decrease in heating usage (Q41) |