marginal cost pricing
marginal cost pricingThe policy of setting the price of a good or service equal to the marginal cost of producing it. If demand at this price is equal to output, it can be argued that marginal cost pricing is optimal, since marginal costs and benefits are equal. If the good or service is produced under conditions of increasing returns to scale, however, marginal cost will be below average cost and the firm will make a loss. Paying for this loss requires a subsidy, either from the state or via cross-subsidization from some profitable activity conducted by the firm. As taxes impose deadweight costs, marginal cost pricing is not normally adopted in practice in industries with decreasing average costs.
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