MARGINAL COST PRICING REVISITED

Marginal cost pricing is the appropriate approach for achieving economic efficiency. Its proper application requires that marginal costs must be estimated on the basis of long-run incremental costs which must include all current and future running costs plus full replacement costs of all existing plant and equipment. If this is not done, unwarranted and, most likely, uneconomic windfall losses or gains may occur. If there are temporary surpluses or shortages, short-run marginal costs, limited to these portions of overall supply, should be used to deal with them.