Prometeus57 wrote a great post.
Robert, yes, sunk costs are the initial fixed costs
for the infrastructure.
Marginal cost, in pure mathematical terms, is the
first difference of cost (there are also second
differences and higher, but just the first difference
Marginal cost is the cost of producing one more "item"
(one book, one donut, one subway ride, etc.) Usually,
you can take total cost for producing N+1 items minus
total cost for producing N items, and that is the
But with transportation, which is labor-intensive, you
should probably choose to allocate labor at the
passenger level, and thus include it in the marginal
cost (pretend labor is paid by the passenger rather
than by the hour). If you don't include it, marginal
cost is practically zero, as it would only be a small
amount of additional diesel fuel or electricity to
carry around one more passenger.
You could also look at the marginal cost of additional
routes in an already existing system -- marginal cost
of a route, as opposed to marginal cost of a
passenger. For example, creating skip-stop or express
trains on existing track that currently runs local
only. The track is already there, but you need to buy
rolling stock (the trains), and possibly signal
Finally, you could also include 7% of the fixed cost
in your "variable" cost (interest on the fixed cost).
This is necessary for a private business in a
competitive market to price its products, since it
must pay the fixed cost somehow. For example, with
airlines, to stay afloat the average fare needs to
cover labor and fuel (marginal costs), and for the
aircraft, the lease payments, or depreciation plus
interest expense or opportunity cost if not financed.
--- Robert Hines <robhines@...
> > What's wrong with your argument? It assumes that
> sunk costs should be
> > paid for in the exact same way that marginal costs
> are paid for. And
> > in fact they shouldn't because they can't.
> I'm a first year student, so could you clear
> something up for me before
> I give opinions based on confusion. When you are
> talking about sunk
> costs, you mean fixed costs for the initial
> infrastructure? And marginal
> costs derived only from the portion of variable
> costs, not total costs,
> used to provide service for one customer? From my
> understanding of what
> marginal costs are, they include both fixed and
> variable costs.
> Rob Hines
> 100 Riverdale Drive
> Sydney NS B1R 1P4
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