Marginal cost and the general welfare in relation to problems of transport pricing and investment choice

Abstract

The search for an efficient principle of transportation and utility rate-setting has a long and checkered history which has variously embraced average cost, marginal cost, and value of service, as well as variations and combinations thereof. Obviously, the principle adopted by regulatory agencies can have a decisive impact on molding future transportation requirements and regional development patterns, and the matter assumes greater urgency as planners from less developed economies attempt to establish pricing policies for their public sector projects, and, in this, look to the western economic literature for guidance. Today, cost appears to enjoy greatest favor among economists writing on the subject in the area of transportation and, although there are differences of opinion in this literature regarding the correct cost criterion, we can detect a growing presumption that marginal cost represents a goal to be striven for in setting transportation prices.