Marginal Cost Pricing

Discipline: Economics

Marginal Cost Pricing is a pricing method according to which firms set the prices of their products by taking into consideration the marginal cost of production, which is the cost of producing one extra unit of the product.

Governments commonly employ marginal cost pricing method when pricing noncompetitive industries such as public services and utilities where the aim is to maximize the economic welfare of the state.

Since marginal costs tend to decline along with further production, firms that employ marginal cost pricing may suffer loss of profits, and may eventually fail to cover their fixed costs.

Also see: administered pricing, average cost pricing, mark up pricing, rate of return pricing, target return pricing

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