The marginal cost pricing theory

Marginal cost pricing theory suggests that firms should set the price of a product equal to the additional cost of producing one more unit. This approach ensures that resources are allocated efficiently, as prices reflect the true cost of production. It helps prevent overproduction or shortages because it signals to producers when to increase or decrease output. This principle is often used in public services or utilities where covering the exact cost of one extra unit can lead to optimal resource use without excessive profit margins. Overall, it aligns prices closely with the actual cost of production for each additional item.