A note on capital indivisibility and the definition of marginal cost

Ambiguity in the interpretation of marginal cost emerges where capital indivisibility is present. The indivisibility condition is particularly applicable to new water projects in which large capital investments are required to place a central system into full operation. Marginal cost is defined in four ways. The definitions all incorporate future costs and output only; the definitions vary in the extent to which they focus on short‐run versus long‐run allocative efficiency, and in the extent to which they attempt to minimize price fluctuations in the context of lumpy investments.