benefits and costs should be the competitive market system in which ultimate choices are made by the “sovereign” consumer.
If this system is to work efficiently, the prices of all the competing costs and services that buyers confront, and on the basis of which they make their choices, must accurately reflect the respective costs to society of providing them. More precisely, the price of each product must equal its marginal cost, the cost of producing a little bit more, or the cost that would be avoided if buyers consumed a little bit less. The reason for this is that the demand for all goods and services is, in some degree, elastic—if price goes up, buyers will typically take a little bit less, if price goes down, they will typically, take a little more. If then, buyers are to make their individual choices in such a way that they will, as a group, get the maximum total satisfaction from our limited total productive capacity, the prices by which they are guided must reflect the cost to society of producing a little bit more, or its savings from producing a little bit less. Only then will consumers know what sacrifices they are imposing on society (and therefore on themselves as a body) by behaving correspondingly, and (according to this idealized conception) consume just the right amount of each good and service—neither too much (carrying their consumption beyond the point where incremental costs exceed incremental benefits) nor too little (refraining from consumption whose incremental benefits exceed the incremental costs to society).
By this reasoning, one prerequisite for achieving the proper degree of conservation, or economizing, in the use of energy, is that its price be equated to its marginal social cost of production. In fact, our pricing of electricity falls far short of this requirement in many ways, of which we can mention only the most prominent.
Electric utilities are in most jurisdictions regulated on an original, or historic, cost basis. This means that their capital costs (depreciation, return on investment, income taxes), which bulk extraordinarily large in this industry compared with most others, are measured