The Theory of Public Utility Pricing and Its Application

In the 1930's and 1940's, the view came to be held that the right policy was to make public utility prices everywhere equal to marginal cost, even where marginal cost was less than average cost and a government subsidy was required to maintain production. This policy proposal had serious weaknesses. It did not take into account the stimulus to correct forecasting of having a subsequent market test whether consumers were willing to pay the total cost; it ignored the probably effects on the administrative structure, with state enterprise and centralized operations superceding decentralized operations; it involved a redistribution of income in favor of consumers of products produced in conditions of decreasing costs; it failed to take into account the misallocation of resources resulting from the additional taxation necessitated by the subsidies.