Peak load pricing with spatial diffusion

The demand for public utility service varies not only temporally but spatially as well. The analysis of the problem of meeting these variations in system load with optimum plant capacity within the framework of a price determination structure is the objective of this paper. No simple cost-based solution proves possible. The solution presented, under a social welfare-maximization criterion, is similar to the joint product pricing discussed by Marshall. The characteristics of peak load pricing developed apply to the profit-maximizing firm as well as to the welfare-maximizing firm. With a profit-maximization objective, price will exceed rather than equal marginal cost. When regulation is imposed, whatever its form, normally there will be a price reduction as the output of the firm is moved closer to the welfare-maximizing level.