Document Type : Research Paper
Author
Assistant Professor, Faculty of Economics, Allameh Tabataba'i University
Abstract
In recent years, the provision of free or fully discounted utility bills for low-consumption households—covering electricity, gas, and water—has attracted growing attention from policymakers as a means of promoting resource efficiency and supporting vulnerable groups. This approach can be interpreted as a form of “free consumption threshold,” which can be modeled within the framework of a three-part tariff (3PT). The study argues that by adopting simple and intuitive tariff structures, particularly those with fewer blocks, it is possible to pursue multiple, and at times conflicting, objectives in public utility pricing—provided that tariff design and implementation are grounded in theoretical insights, empirical evidence, and phased execution. The 3PT structure consists of two consumption blocks and a fixed periodic charge (subscription fee), with a marginal price applied beyond a defined threshold. Our theoretical analysis shows that under purely efficiency-driven objectives, the existence of a free initial block is not justifiable, implying that additional goals—such as equity, minimum access, consumption control, and financial sustainability—must be considered to justify its inclusion. Based on simulation results, the three-part tariff allocates a larger share of total subsidies to lower-income households (up to about 42 percent of total subsidies in the lowest income quintile), although this improvement in equity comes at the cost of reduced efficiency. Therefore, a careful and phased adjustment of tariff parameters—particularly the subscription fee, the size of the first block, and the marginal price—is essential to balance equity, efficiency, and other policy objectives.
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