So consumer surplus, deadweight losses,.etc are bogus concepts?
Now you’re cooking with gas.
So consumer surplus, deadweight losses,.etc are bogus concepts?
What do these have to do with price being value? If you are willing to pay a certain price for a good that means you value the good higher than the price you are paying, it doesn’t mean that the values are equal. Prices are derived from valuations, but prices do not represent valuations quantitatively.
Ah, thanks.
It’s these fundamentals that are never fully clarified in college. TBH, we are even taught that ordinal and cardinal utility are one and the same in terms of what they represent.
There are many cases of fixed costs and tiny marginal costs. The theoretical answer is that the people that use the bridge are the same people that own the bridge. This is sort of like a members club in combination with a season’s pass. Before the bridge is built, a company would publically anounce that everyone is able to buy shares in the bridge. This money would pay for the fixed costs. As a perk of ownership, when using the bridge, only a tiny cost would have to be paid.
The problem remains that it still might not be worth it for some of the low-util people to buy in.
Hypothetically, the bridge is an investment. To compare fixed costs with one years worth of tolls is crazy. A proper return on investment is around 5 to 8% a year. The tolls only have to cover say 8% of the fixed costs each year to be a worthwhile investment.
So if the fixed costs were 3mil, the yearly revenue would only have to be $240,000.
I realize that this does not solve the entire theoretical problem.
Thank you. This is what I was looking for.
Also, the demand schedule was meant to be for the entire life of the bridge.
I mentioned in my post that precise price discrimination could solve the problem, but I can’t imagine the precision necessary to make it profitable being possible.
Jackson,
TropicalK does indeed show how price discrimination could be carried out precisely. I understand now what you were looking for. Thanks for the exercise.
This is a problem of property in land.
Imagine that the free market were tasked with building a door for your home. How would it proceed? Would companies compete to build a toll-operated door to your home, making you pay a quarter every time you entered your house? Or is it really your responsibility, as a home owner, to install a door?
There’s a few ways to approach this.
First, it should be pointed out that a good government is also a public good as shown by public choice theory. Voter ignorance is rational because gathering all the relevant information is costly and doesn’t bring any individual benefit unless everyone else does the same, in which case you can just free-ride off of them anyway. Voting expressively (for whatever feels good regardless of the effects (see: farm subsidies, minimum wage, quality regulations etc) on the other hand is a free private good. So people will vote for parties that produce great rhetoric or have charismatic leaders even if their policies are disastrous (see: all of politics, ever). If the answer to the public goods problem is supposed to be have the government provide then essentially this reduces to “create one massive public good that controls all other public goods”. I think that qualifies as a non-sequitur.
Second, as many people have noted already, the demand schedule is all hypothetical without an actual market. To know that X consumers are willing to pay Y for a certain good you need to sell it to them because only if they actually have to give up Y do they count as demonstrating a preference for the good over Y. If you simply ask them they could say anything if it doesn’t commit them to paying for it. The efficient price is supposed to be equal to marginal cost but removing the market makes P unknowable. Two additional problems being even if they did know P they still lack an incentive to make it equal MC and governments usually produce at (much) higher costs than private firms so even if P equalled the new MC you couldn’t conclude it was efficient.
There are a few ways of getting around the public goods problem on the free market. This goes into them briefly. The best two are, imo, packaging and assurance contracts. If you bundle a public good with a private good (like a lighthouse with a port) you can fund the former through revenue from the latter (which should be valued higher because of the packaging). So for example you would have all the businesses whose customers and suppliers use the bridge pay for it as an investment. An assurance contract is where you get everyone to pledge money for a project that they only have to pay if the project recieves enough funding to be built. You can also have the contract specify everyone who might use it has to pledge before it gets built so no one can free ride. Does this have transaction costs? Yes. Are they any bigger than having the government hand out a survey? No, plus the data is more reliable (see: argument above).
In the end it boils down to this. The public goods problem is just that - a problem. All forms of social organisation must face it the question is which form will cope best. When an entrepeneur solves the problem he stands to make a fortune. When a government bureaucrat solves the problem then the best they can hope for is that their budget wont get cut and given to less efficient departments. This is why the market works better.
If the project is profitable then the government doesn’t need to do it; the private sector will.
Rigorous argumentation there. Of course, I can understand why the market looks so good if you’re working of the unwarranted assumption that pecuniary profit and welfare gains are always aligned.
EiT, why are you so down on the market? You get fired from McDonalds or something?
EIT, how many times are we going to discuss monopoly pricing (which I assume you’re referring to)?
What about opportunity cost, the limitations of knowledge, the impossibility of conducting utilitarian calculus, and the fact that investment in a loss making venture creates a deficit of wealth and consumption of scarce capital?
How are YOU going to say that a loss-making venture may be socially beneficial or more beneficial than any alternative that does not consume scarce capital? Prices and interest rates are the only information we ever have.
EIT, how many times are we going to discuss monopoly pricing (which I assume you’re referring to)?
Until you provide some model that proves, a priori, that dynamic efficiency gains will always exceed static efficiency gains for a natural monopoly (which seems all the more unlikely in “markets” such as those for bridges where R&D expenses are a one shot affair). There have already been models for the pharmaceutical industry which state that such a result cannot be proven since it depends on the shape of the R&D production function as well as utility functions and the like.
How are YOU going to say that a loss-making venture may be socially beneficial or more beneficial than any alternative that does not consume scarce capital? Prices and interest rates are the only information we ever have.
The point is the prices and interest rates will systematically lead entrepreneurs away from what would otherwise be welfare enhancing projects.
Welfare enhancing as defined by whom?
I think this is the operative phrase. You don’t like the market because it doesn’t always conform to your idea of “welfare enhancement” – that is, it doesn’t give you everything you want. But since when are you (or anyone else) entitled to that?
first one to make a 'Neoclassical Economics: Its a trap!" meme wins.
keynesian economics would fit too…
Let’s be precise.
I assume that when you speak of monopoly, you’re referring to firms that cut production in order to charge prices above what they would have been in a theoretical world of general equilibrium and perfectly competitive markets. It’s important to stress this because some define monopoly solely by referring to market power/size. But in many cases, industries with a high HHI (Herfindahl Index) often yield lower prices relative to industries that are “more competitive,” i.e., have a higher amount of producers (all other things equal). In other words, the number of firms in any given industry says absolutely nothing about its competitiveness/static and dynamic welfare gains.
Next, we must ask how the monopoly emerged and can it possibly persist. Monopolies require barriers to entry, some of which can emerge naturally through free market competition (cost barriers) and some of which (most of which) are arbitrary decrees (regulations and other interventions). We’ve already discussed the former previously, and you refer to it in your response (dynamic efficiency), and the latter is irrelevant for this discussion.
Now, your request is meaningless. I can’t measure dynamic efficiency (future welfare gains) nor can I measure static efficiency (current welfare gains). Utils don’t exist and value is simply a list. Thankfully, we don’t have to bother ourselves with theoretically untenable models when dealing with such an issue. All that’s required is a little bit of logic and some common sense. The perfectly competitive market structure does not allow for supernormal returns (no retained earnings) and/or technological innovation. All costs and prices are fixed, and any deviation moves you away from MES, and therefore destroys profitability. At the same time, though, technological innovation is a natural consequence of “imperfectly” competitive markets and is the major determinant of long-run economic growth (see Solow’s model). It seems to me that the best and only way to measure welfare gains is by referring to long-term economic growth.
Let me put it this way: would you rather drive a very cheap model-T or would you be willing to pay a higher price for a Nissan 370z? I know this sounds ridiculous, but it’s only because your request is absolutely ridiculous. You’re questioning the obvious. Now, you may say that we must balance the two, that there’s a tradeoff. I certainly agree, but who or what can do this better than the market? How does the government know where this equilibrium position, so to speak, is?
Either way, If it’s profitable, “greedy” entrepreneurs will do it.
Show me.
This bridge question does not make any sense at all. What is disturbing is that there are economists (or should I say “economists”) who spend their time designing and then trying to resolve such “economic problems”. I know that this is not a valid logical argument against the question, it is my opinion. I do not write about the logic of the question, because others before me have done so.