Optimal introduction of time-of-day tariffs in the presence of consumer adjustment costs (Q914530)

The introduction of time-of-day tariffs (TOD tariffs) receives considerable attention in both the theoretical and the applied literature. However, the conventional models of peak load pricing may only inadequately describe the problem because the consumers' choice of appliances were based on the (right or wrong) uniform tariff. Hence a radical change could devalue the sunk investments and will require costly adjustments. It will be shown that the welfare-optimal tariff need not account for sunk costs and consumer adjustment investments, but rather the same TOD tariffs remain optimal independent of consumer adjustment costs. This result applies to both cases of consumer expectations treated in this paper: rational expectations and myopic consumer expectations.