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Increasing Returns and the Inefficiency of Cost Minimization

Richard Arnott () and Richard Harris

Working Paper from Economics Department, Queen's University

Abstract: This note demonstrates that cost minimization may result in an inefficient allocation of resource if there are multiple techniques of production and one or more techniques exhibit increasing returns to scale. This result is true even if all output are priced at marginal cost. The nature of this inefficiency is explored and an alternative procedure is examined which avoids the inefficiency associated with cost minimization.

Date: 1977
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