Marginal-Cost Pricing

Abstract

In this chapter we shall assume that elsewhere in the economy all the Pareto optimum (first- and second-order) conditions are satisfied [39]. Thus we assume that between any pair of ‘goods’ (which may be defined as either commodities or factor services) which are assumed to be consumed in some amount by all members of the community, the marginal rate of substitution is common to all individuals in the community, and that this common rate is equal to the inverse of their price ratios. In addition we assume that the marginal rate of transformation between any pair of ‘goods’ (which again can be either commodities or factor services) is equal to that for all other pairs of ‘goods’ and that this common rate is again equal to the inverse of their price ratios. In all markets demand is assumed to equal supply, with the marginal rate of substitution equal to the marginal rate of transformation. Thus prices are assumed everywhere else to equal marginal costs. It is also assumed that there are no externalities, that the consumer is the best judge of his own welfare, and that from the point of view of public-enterprise pricing policies the distribution of income is to be considered as being ideal.