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Chapter 10: Efficient Pricing of Electri... > 10.1. The debate on the optimal pric... - Pg. 283

CHAPTER Efficient Pricing of Electricity In this chapter, we examine the various methodologies by which rates are set under regulation and the reasons that these rarely lead to a Pareto effi- cient outcome, which occurs when no one is made better off if someone else is made worse off. In fact, only by pricing at marginal cost, which is both allocatively and productively efficient (and maximizes welfare), does such an outcome result, and this is the theme of this chapter. 10 10.1 THE DEBATE ON THE OPTIMAL PRICING OF ELECTRICITY: A BRIEF HISTORY The idea of marginal cost pricing is not new; for centuries, economists have espoused that pricing goods and services at marginal cost is both allo- catively and productively efficient. In the case of electricity, it was actually