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Marginal and Average Cost Pricing

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Abstract

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.

This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume

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  1. http://link.springer.com/referencework/10.1057/978-1-349-95121-5

    William Vickrey

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  1. William Vickrey
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    Vickrey, W. (2008). Marginal and Average Cost Pricing. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_904-2

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    • DOI: https://doi.org/10.1057/978-1-349-95121-5_904-2

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    • Publisher Name: Palgrave Macmillan, London

    • Online ISBN: 978-1-349-95121-5

    • eBook Packages: Springer Reference Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences

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    Chapter history

    1. Latest

      Marginal and Average Cost Pricing
      Published:
      17 March 2017

      DOI: https://doi.org/10.1057/978-1-349-95121-5_904-2

    2. Original

      Marginal and Average Cost Pricing
      Published:
      24 November 2016

      DOI: https://doi.org/10.1057/978-1-349-95121-5_904-1

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