According to the scenario, though, the firm(s) are unable to increase the water supply sufficiently within the year, and unable to supply the minimum water requirement for either group.
In the long run, perfect competition leads that all firms tend toward zero profit margin.
At least that is what I was taught in elementary Economics courses.
I’m aware. It makes no difference.
-Jon
i recommend that the residents put as much money as they can into purchasing stock in the local water supply firm
As long as we’re talking about hypothetical situations, we might as well take it to extremes.
Suppose that someone’s 21-foot sailboat sank off of the west coast of Africa and that this person ended up adrift in a life raft. Because of the currents, the raft headed west toward the Americas. This person has no food or potable water on the life raft, so the only way to stay alive for the 76 days before he is rescued by fisherman from the Caribbean is to use his solar still to gather water and rudimentary tools to gather food.
In the case of Steve Callahan, we don’t have to speculate as to how he would react to such a situation in 1981 (the book is Adrift: Seventy-six days lost at sea, 1986). He managed to stay alive by consuming as little as a third of a pint of water each day. The current minimum wage is $5.15 per hour, so, if we very conservatively estimate Callahan’s wage at $5.15 per hour and, again, very conservatively estimate his time collecting food and water at 12 hours per day, we end up with a minimum of $61.80 per day as his subjective value of a third of a pint of water and a few strips of fish.
So, are you going to water your golf course at the expense of people earning minimum wage when the cost of water is at least $741 per gallon? I think that you’ll have to charge some big-time greens fees.
Where does ‘perfect competition’ exist…outside of elementary economics courses?
From what I understand in The Real World™ profits tend towards the simple interest rate as there is little, if any, incentive to risk capital on projects where your return is less than a virtually risk-free investment as a loan.
I don’t think this assumption is correct. This is the kind of view people who have never been in business tend to have: that once you are in business there is some sort of conveyor belt that takes you along.
Profit depends on what you can sell your products for, which depends on your competition and your customers; and your costs. These variables all change all the time.
Expanding involves more cost and more risk, and so sometimes staying with your current size may make better business sense.
“companies tend to have some average percentage profit if they survive at all”
But not all companies survive, so you can’t say at any one time the average rate of profit is positive. It’s called “survivor bias”.
“Health insurance companies, for example, would have incentive to increase the amount of procedures done (necessary or not)” Health insurance companies pay for the procedures, so they would have an incentive not to have them done. I suppose you mean that if health care was more expensive in catastrophic cases people would be unable to afford the expense if they didn’t have insurance. Therefore health insurance companies have the incentive to make more expensive procedures common if there is a cheaper substitute, (whether or not said substitute is as effective). This is true, but they can’t provide the level of incentive to providers that customers can by patronising the cheaper service. Certainly they could encourage providers to do the expensive procedure on their customers (that might even be to their customers good if the company pays and it’s actually better) but obivously they have an incentive not to do this. The presence of health insurance companies themselves of course makes the payer and the beneficiary of a procedure different, encouraging procedures that aren’t worth the money. This is a problem but not insurmountable, not what I think he meant though.