Problems of marginal-cost pricing in public utilities
This article surveys the problems of applying marginal-cost pricing to public utilities against the background of recent developments in that direction. The rationale of marginal-cost pricing is rather straightforward: the economic significance of the costs of a unit of service varies between units and between users. Marginal-cost pricing will, in theory, allocate costs in a manner consonant with the cost consequences of marginal adjustments by individual utility customers. Costs will be allocated to and borne by those who create them. Indeed, with regard to the provisions of utility service as a whole, it is costly not to have marginal-cost pricing insofar as other pricing schemes result in over- or underproduction. Although the principle is clear enough, it is more widely asserted than adopted and practiced. Moreover, its application runs into serious difficulties. The author tells what the concept properly means for public utilities and what it does not mean; ways in which it presently can be applied in rate making; and the work that remains to be done before marginal-cost pricing can be more effectively applied by utilities and regulators. (MCW)
- Research Organization:
- Michigan State Univ., Lansing
- OSTI ID:
- 5694064
- Journal Information:
- Public Util. Fortn.; (United States), Journal Name: Public Util. Fortn.; (United States) Vol. 105:3; ISSN PUFNA
- Country of Publication:
- United States
- Language:
- English
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