TOTM
‘Optimal Departures from Marginal Cost Pricing’ by William J. Baumol & David F. Bradford
Truth on the Market
View Original Source
William Baumol and David Bradford’s 1970 article “Optimal Departures from Marginal Cost Pricing” is a cornerstone in the economics of public utility regulation. While it appeared in the American Economic Review as a work of formal economic theory—complete with equations and proofs—it also has clear significance for law & economics. Baumol and Bradford demonstrate how regulators should think about pricing in industries where marginal cost pricing—the economists’ ideal—is not feasible. That problem arises in settings like electricity, telecommunications, and transportation, where costs are often decreasing, and prices set equal to marginal cost would not recover total expenditures.