As we learned in question 4, allocatively efficient production leads to a price of 1 and output of 50, with losses of 100. For a two-part tariff to work, the amount of the connection fee must cover those losses. Since there are 20 consumers and losses of 100, the connection fee per consumer must be 100 ÷ 20 = 5. To the right we show revenue from sales as the green area and revenue from the connection fee as the blue area.
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