Marginal cost pricing
Definition. Marginal cost pricing is the rule of setting the price of a good equal to its marginal cost of production. Because price reflects the value consumers place on the last unit, this rule achieves allocative efficiency, where the marginal benefit to society equals the marginal cost.
At this price and output, resources are allocated so that social welfare is maximised. Where external costs or benefits exist, allocative efficiency instead requires price to equal marginal social cost rather than private marginal cost.
This term belongs to Allocative Efficiency and Market Failure in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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