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UBC Theses and Dissertations

The principle of marginal cost pricing Copes, Parzifal

Abstract

In this thesis an attempt is made to describe the main features and some of the attendant problems of a system of price determination which has been recommended by several economists as the socially most desirable pricing system. The principle on which this pricing method is based is referred to as "marginal cost pricing", because it requires that all prices for economic goods should equal the marginal costs of their production. The basic reasoning which underlies the formula of marginal cost pricing is simply that wherever society can produce an additional item of any product at a cost less than the value which any member of society is willing to surrender for that item, it should be produced. By making the price of each good equal to the cost of producing an additional (marginal) item, consumers will be encouraged to demand exactly the output thus produced. Two analytical approaches to the matter are presented. First a summary is given of Professor Lerner's theory of marginal cost pricing, based on the marginal substitutability concept of the indifference theory of value. However, most of the problems involved lend themselves better to analysis along the lines of the utility theory, in terms of which the remainder of the thesis is written. Special emphasis is placed upon the equilibrium of the firm under marginal cost pricing and upon the influence of taxation. A discussion of the main criticism brought out against the marginal cost pricing theory, both of a theoretical and a practical nature, is also presented. The conclusion reached in the thesis is that if price determination could be considered an isolated problem marginal cost pricing would indeed appear to be desirable. Institutional complications, however, make a universal application of the principle appear both improbable and Inadvisable within the forseeable future.

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