The locational marginal pricing (LMP) scheme is a commonly used pricing scheme in domestic and international electricity spot markets. Existing research has discussed certain economic properties of LMP under specific market-clearing models. However

current studies lack a thorough analysis of the conditions under which LMP ensures properties including interpretability

competitive equilibrium

cost recovery

and revenue adequacy. The limitations of LMP require systematic demonstration. When LMP fails to guarantee properties in actual market clearing problems

it may lead to significant lost opportunity costs or cost recovery shortfalls

which is detrimental to the stability of market operations. Therefore

this paper comprehensively analyzes the economic properties and limitations of LMP. Firstly

it summarizes the economic properties an ideal pricing scheme should satisfy

delineating the property requirements. Then

based on a market clearing problem that considers multiple types of market participants

including thermal and hydroelectric units

this paper derives the price formulation

systematically organizes the conditions under which LMP guarantees these properties and proves them. It clarifies the mechanism by which LMP can satisfy economic properties under specific market-clearing models or the reasons for potential property impairments. Finally

this paper constructs simple and illustrative cases that demonstrate the impairments of the economic properties of LMP under actual market clearing conditions

such as the optimality limitation of the dispatch solutions

the non-convexity of thermal units

the upstream and downstream coupling of hydroelectric units

and restrictions on planned electricity

thereby substantiating the limitations of the LMP scheme in practical applications.