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What Is Zero Marginal Cost?

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  • Written By: John Markley
  • Edited By: Melissa Wiley
  • Last Modified Date: 20 August 2016
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Marginal cost is the term used in the science of economics and business to refer to the increase in total production costs resulting from producing one additional unit of the item. Zero marginal cost describes a situation where an additional unit can be produced without any increase in the total cost of production. Producing another unit of a good can have zero marginal costs when that good is non-rivalrous, meaning that it is possible for one person to consume the good without diminishing the ability of others to simultaneously consume it as well.

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Marginal cost is not the same thing as the average cost of a unit, because things like fixed costs and economies or diseconomies of scale mean that the marginal cost of each additional unit can change as the total quantity changes. For example, manufacturing one metal soda can in a factory requires only a few cents' worth of metal, so if a can factory is already operational and is not constantly running at maximum capacity, the marginal cost of an additional can is very small. The marginal cost of the factory's first can was enormous, however, because increasing the number of cans produced from zero to one required a large fixed cost that had to be paid to make any can production possible. The initial fixed cost was the expense of building the factory in the first place, along with other expenses, such as the cost of seeking out and hiring enough workers to make the factory's machinery start up and run.

Thus, saying that an additional unit of some commodity can be produced at zero marginal cost is not the same as saying that the commodity in general can be produced for free. Most non-rivalrous goods also have fixed costs that must be paid before they can be produced at all, even if there are no additional costs after that. Goods that can have additional units produced at zero marginal cost are not things that the person consuming it takes physical possession of, because that would make them rivalrous. Instead, they are usually goods such as experiences, services, or events.

In many cases, goods can be produced for zero marginal cost only up to a certain capacity. For example, once a movie is being shown at a movie theater, the marginal cost for the movie theater of having one more person watching the movie is zero as long as the movie has not sold out, because the costs incurred by the theater for each time it actually runs the film are not affected by the number of people in the theater. The marginal cost of increasing the number of people who can watch the movie remains at zero until the theater is at full capacity, at which point the good becomes rivalrous because it is no longer possible for an additional person to see the movie without displacing someone who also wishes to see it. This raises the marginal cost of the next ticket sold above zero, because increasing the number of people who can see the movie by one would now require the theater to run additional showings of the movie or increase the number of seats in the theater. Once capacity has been increased in this way, the marginal cost of more units returns to zero until all capacity is filled again.

The term “zero marginal costs” is commonly used to refer to cases where the marginal cost of producing the good is actually not quite zero but is so close to it that units of the good can often be treated as if they were. For example, if a passenger train still has seats open, adding passengers to those seats will very slightly increase the amount of fuel the train will consume in order to reach its destination, because their presence means more mass that the engine must move. The mass of an additional person, however, is so small compared to that of the train that this cost is so small as to be irrelevant. Goods that can be sold and distributed via the Internet, such as computer software or electronic books, still require bandwidth and electricity for each copy, but the marginal cost of any individual copy is negligible.

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