Marginal Costs and Capacity Utilization: Calculating Short-Run, Medium-Term, and Long-Run Marginal Costs in the Ferry Industry

In order for Norwegian ferry industry short-run, medium-term and long-run marginal costs (LRMC) to be simultaneously estimated, there is application of a multi-product cost model. Three capacity utilization measures define the independent variable whose interrelationships are used to calculate marginal cost concepts. In this model, capacity utilization's important role is specifically addressed. Fares should be based on marginal costs for welfare to be maximized. Norwegian ferry industry 2003 empirical data shows that with respect to LRMC, short-distance crossing passengers are charged relatively higher than long-distance crossing passengers. From a marginal-cost pricing perspective, therefore, this highly regulated industry's fare scheme is not welfare optimal.