Capital indivisibility and economic efficiency

Methods of setting charges when investment is ‘lumpy’ are examined against the criteria of maximizing economic efficiency. A specific relationship between demand and charge along with exponential growth are assumed in order to derive analytic and numerical results. True marginal cost appears to be optimum under the idealized assumptions. Some present value or present worth methods are shown to be deficient. A revised version of the Long‐Run Incremental Cost algorithm is proposed. Reference is made to charging methodologies in the regulated UK electricity distribution industry.