American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Do Consumers Distinguish Fixed Cost from Variable Cost? "Schmeduling" in Two-Part Tariffs in Energy
American Economic Journal: Economic Policy
vol. 17,
no. 2, May 2025
(pp. 194–223)
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 its policy implications for two-part energy tariffs, this schmeduling behavior makes fixed costs directly relevant to the perceived relative prices of goods, and therefore alters the welfare implications of price, tax, and subsidy designs.Citation
Ito, Koichiro, and Shuang Zhang. 2025. "Do Consumers Distinguish Fixed Cost from Variable Cost? "Schmeduling" in Two-Part Tariffs in Energy." American Economic Journal: Economic Policy 17 (2): 194–223. DOI: 10.1257/pol.20230613Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- L94 Electric Utilities
- O12 Microeconomic Analyses of Economic Development
- P28 Socialist Systems and Transitional Economies: Natural Resources; Energy; Environment
- P36 Socialist Institutions and Their Transitions: Consumer Economics; Health; Education and Training: Welfare, Income, Wealth, and Poverty