BP Fines and Gas Prices

A fine is a one-time fixed cost. Pricing decisions are short-run decisions. Profit-maximizing firms will produce the quantity of output and set their price to make marginal revenue equal to marginal cost. Marginal cost is the cost of producing one more unit of output. Therefore, marginal cost is not affected by changes in fixed cost. Fines and other one-time penalties are fixed (sunk) costs. Since they have no impact on marginal cost they cannot affect price or output. Continue Reading →