Marginal and Average Cost Pricing
Under perfect competition, marginal cost and average cost of a product are equal to each other and to its price, an arrangement that is Pareto-optimal in the absence of neighbourhood effects. Technical progress is making it possible to vary the prices of some products (such as telephony and electricity) from moment to moment in accordance with marginal cost. Such responsive pricing would help guarantee essential services and reduce the cost of providing reserve capacity. Where there are economies of scale, prices set at marginal cost will fail to cover total costs, thus requiring a subsidy.
KeywordsAirline industry Average cost pricing Congestion charges Depreciation Economies of scale Electricity markets Escrow funds Excise taxes Inverse elasticity rule Land rents Land tax Leakage ratio Long run and short run Marginal and average cost pricing Non-price competition ‘One-horse-shay’ asset Price discrimination Price stability Quantity–volume interrelationships Ramsey, F. Reservation price Responsive pricing Second-best pricing Spatial economics Sticky prices Subsidy Vickrey, W.S.
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