average cost pricing

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The policy of setting prices so as just to cover average costs, allowing the producer to break even. While this is not a profit-maximizing policy (except when there are constant returns to scale so average cost is equal to marginal cost), it may be a policy followed by a government-controlled firm, or for a private but non-profit-making body. Marginal cost pricing is the first-best pricing policy for a producer operating in the public interest but this requires any losses to be financed without imposing deadweight costs elsewhere in the economy. Average cost pricing, where goods are sold at the lowest price consistent with covering average costs, ensures there are no losses to be financed, so can be a second-best optimum.

Subjects: Economics.

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