Why it matters
Policy can encourage reduction where the next unit is cheaper to avoid. Comparing marginal rather than average costs helps explain the allocation of reduction effort.
A worked example
A first tonne costs £10 to avoid; the next costs £25 as easy improvements are exhausted. The marginal cost of the second tonne is £25, not the £17.50 average.
Illustrative example · simplified assumptionsA common mistake
Confusing total or average reduction cost with the next unit’s cost.
Where the idea needs care
Costs can vary across technologies and firms; they do not always rise smoothly.
Apply the idea
Explain this concept using a different example from your spending, work, business or a policy debate. State what stays fixed and what could change the result.
Sources and further study
Examples and explanations by Alibomics. Numeric illustrations are not current market quotations.