22 



MULTIPLE PURPOSE RIVER DEVELOPMENT 



FIGURE 2. The Consumer's Budget Line 



of substitution between A and B. An efficient allocation of the 

 consumer's budget, then, will require that the marginal rate of 

 substitution between two commodities used by the consumer is 

 equal to the ratio of their prices. 



In perfectly competitive markets, with only one price for any 

 commodity,^ it follows that the marginal rate of substitution 

 between any two commodities must be the same for all consumers 

 using both. This distribution by the competitive pricing system, 



' Unless all units of a commodity are exchanged for the same price, purchases 

 at below-equilibrium prices for resale at higher prices will bring all sales prices 

 to an equilibrium. See Eugene V. Bohm-Bawerk, The Positive Theory of 

 Capital (William Smart translation; New York: G. E. Stredhert & Co.), Book 

 IV, Chapter iv. 



