Optimal two-part tariffs in a model of discrete choice

In this paper we study welfare-optimal two-part tariffs in a model of discrete choice. The determinants of the sign and magnitude of the fixed and variable tax are analysed in terms of the nature and degree of consumer heterogeneity, the price sensitivities of participation probabilities and conditional demands, and the nature of distributional concerns. In the absence of distributional concerns, the model generalises the ‘corrected’ Ramsey rule for the variable tax and it shows that, in the absence of collection or fixed participation costs, the fixed fee may be negative. The conditions that determine the sign of the participation fee turn out to have an intuitive economic interpretation. Finally, the implications of distributional concerns for the optimal fixed and variable taxes are analysed.