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This state-of-the art paper sets out recent developments in the engineering-economic analysis of electric power systems, especially the formulation of optimal investment and pricing policies. The basic economic principle is that electricity services should be provided in a manner which maximizes the net benefits of consumption of society as a whole. In investment policy, this principle may often be reduced to the simpler rule of minimizing total costs subject to specific constraints. In pricing policy, rates should reflect the marginal costs of supply, thus ensuring that economic efficiency criteria are satisfied. However, these marginal costs must be systematically adjusted to yield a practical tariff structure that meets other policy objectives. Several case studies are provided which illustrate the practical application of the methodology to optimize investment planning and reliability, system losses, and tariffs.