The Relation of Prices to Marginal Costs in an Optimum System

Abstract

In the July issue of Econometrica¹ I gave a new proof, taking account of the interrelations of commodities by methods not available in the times of Dupuit and Marshall, that in a specified sense maximum welfare requires that the quantity of each good consumed or produced by an individual shall be that corresponding to all sales being at marginal cost. This proposition has revolutionary implications, for example in electric-power and railway economics, in showing that society would do well to cut rates drastically and replace the revenue thus lost by subsidies derived largely from income and inheritance taxes and the site value of land.