Abstract
Marginal cost pricing, so often praised in theoretical as well as empirical studies, is correct only for a very idealised economy. When a theoretical model is adjusted for some real world concerns, pricing at marginal cost begins to seem impractical and often incorrect. Baumol and Bradford (1970) wrote perhaps the most striking article along these lines, showing that in an economy where the government has authority to tax, marginal cost pricing is not optimal and second-best solutions are called for.
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