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On Marginal Cost Pricing When Consumers Can Also Produce

Abstract:
Marginal cost pricing, so often praised in theoretical as well as empirical studies, is correct only for a very idealised economy. When a theoretical model is adjusted for some real world concerns, pricing at marginal cost begins to seem impractical and often incorrect. Baumol and Bradford (1970) wrote perhaps the most striking article along these lines, showing that in an economy where the government has authority to tax, marginal cost pricing is not optimal and second-best solutions are called for.

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Energy Specializations: Electricity – Policy and Regulation

JEL Codes:
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Marginal cost pricing, Electric utilities

DOI: 10.5547/ISSN0195-6574-EJ-Vol8-No4-2


Published in Volume 8, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.