Demand-side management and marginal cost pricing in the United States: An optimal combination

Marginal cost can be defined as the cost to produce the next unit of product. Standard economic theory tells us that the optimal price to charge for a commodity should be at the point where marginal cost equates with marginal revenue. This is also the point at which profit maximization occurs. In practical terms however, commodity prices are generally set at, or near, the average cost, including a profit margin. This is done for several reasons, one of which centers around the inability to properly determine the marginal costs for an item at any given time. Typically, the marginal costs will vary with time and can often be difficult to determine. The marginal cost of a product also represents the most competitive price a producer can offer. It is at this point that the maximum amount of product will be sold in the market. Hence, the ability to maximize profit by charging at the margin. The average cost of a product is higher and allows the producer to approach profit maximization by charging a higher price but selling a 1 for a limited no. of customers, and they focused in on efficient equipment installation and replacement. The reasoning behind themore » philosophy of small-scale implementation was that, to date, utilities had limited or no experience with the implementation of DSM programs and as a result did not know which would be effective and which would not. Effectiveness of the programs was generally measured in terms of either their impacts on the utilities rates or society.« less