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On Marginal Cost Pricing When Consumers Can Also Produce

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: D40: Market Structure, Pricing, and Design: General, L95: Gas Utilities; Pipelines; Water Utilities, L94: Electric Utilities, D44: Auctions, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, D11: Consumer Economics: Theory, Q42: Alternative Energy Sources

Keywords: Marginal cost pricing, Electric utilities

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

Published in Volume 8, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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