Peak Pricing

DEFINITION of 'Peak Pricing'

A form of congestion pricing where customers pay an additional fee during periods of high demand. Peak pricing is most frequently implemented by utility companies, who charge higher rates during times of the year when demand is the highest. The purpose of peak pricing is to regulate demand so that it stays within a manageable level of what can be supplied.

BREAKING DOWN 'Peak Pricing'

If periods of peak demand are not well managed, demand will far outstrip supply. In the case of utilities, this may cause brownouts. In the case of roads, it may cause congestion. Brownouts and congestion are costly for all users. Using peak pricing is a way of directly charging customers for these negative effects. The alternative is for municipalities to build up more infrastructure in order to accommodate peak demand. However, this option is often costly and is less efficient as it leaves a large amount of wasted capacity during non-peak demand.

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