Abstract
A marginal cost pricing (MCP) policy for a publicly produced good leads to politically unacceptable price fluctuations when economies of scale exist in plant construction. A partial equilibrium analysis of water supply defines a general, optimal, constant price for water which is a weighted average of the annual marginal short run and capacity expansion costs. For special cases of arithmetic or geometric growth in demand, the demand growth rate and the discount rate determine the fraction of capital costs which a constant price will recover. Under conditions which favor the MCP policy, the constant pricing policy produces ⩾ 98.5% of the net benefits produced by the MCP policy.
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