- Marginal cost pricingsearch for term 'Marginal cost pricing'
expresses the theory that the net benefits of an economic
activity are maximised when prices are equal to the marginal
cost of production. This is because prices measure consumers’
marginal willingness to pay, and therefore the value, of a
commodity or service. The marginal cost is the quantity of
resources, which must be employed to produce a single extra unit
of the commodity. When price equals marginal cost, it indicates
that the cost of the marginal unit of production is just equal
to, and therefore justified by, the value of the extra
consumption. In the case of water resources, the ‘cost of
production’ should be interpreted to include the impact on the
environment. Damage to the environment can lower welfare
directly (e.g. through reduced amenity), or indirectly, through
the need to spend more on water treatment. Also, any current use
must reduce the amount of water available for use in future
periods. This would apply to any store of water,