From: adesai@leland.Stanford.EDU (Atit Dinkarrai Desai)
Subject: Re: Open letter to the libertarian right
Organization: DSG, Stanford University, CA 94305, USA
Date: Fri, 9 Oct 92 01:54:04 GMT

In article <qreoo8c@zola.esd.sgi.com> thant@void.esd.sgi.com (Thant Tessman) writes:
>
>In article <parvin1.718571053@husc11>, parvin1@husc11.harvard.edu writes:
>
>> thant@void.esd.sgi.com (Thant Tessman) writes:
>> 
>> 
>> >If it is actually possible for the introduced competition to make
>> >money (which is the same thing as saying that the costs to the
>> >taxpayers is nill) then there is no reason to say that private
>> >investors wouldn't be encouraged by the market to start it up.
>> >And start-up costs are no less significant when burdening the
>> >taxpayer as when burdening investors.
>> 
>> They certainly are less significant.  The private corporation is concerned
>> only with net profit.  The consumers are also concerned with the actual
>> prices.  So if subsidizing the start-up costs provides an opportunity
>> for a firm to profitably enter into competition and bring down the price
>> level, the net gain to consumers in paying lower prices can easily outweigh
>> the one-shot startup cost.  Of course, the original monopoly loses some of
>> its margin, but the consumers gain.  [...]
>
>Maybe if I say it a fourth time you'll get it.  Either consumers value a
>good more than production costs (including startup costs appropriately
>distributed over time) or they don't.  Assuming consumers do value a
>good, the price for that good always lies somewhere between what the
>market is willing to pay, and what producers need to pay for production.
>The difference between the price and the production costs is the
>producer's profit.  The difference between the price and what consumers
>are willing to pay is the consumers' subjective profit.
>
>Now, either there is room between the price and the production costs
>(including startup costs) to allow for increased production, or there
>isn't.  Another way of saying *exactly* the same thing is that either
>there is profit to be made in increased production or there isn't.
>Profit and value to consumers are inextricably linked and you cannot
>point at one and ignore the other at your convenience.  The other point
>is that it is irrelevant whether those startup costs come from investors
>or from taxpayers.  It may be more evenly distributed when shifted to the
>taxpayers, but it is no less of a cost!
>
>One more time in your terminology:  If it is necessary to subsidize a
>producer in order to provide an opportunity for that producer to enter
>into competition, then the cost to taxpayers of subsidization will
>*always* outweigh the benefit to consumers afforded by lower prices.
>
>thant

I'm sorry, Thant, but the situation Parvin has created is technically
feasible, but see my previous article about why its absurd and unethical to
put it into play.

A silly example:
Assume an inverse demand function : p= 10 - q. where p = price and q = quantity
sold. Assume a Marginal cost of $2/unit and a fixed plant cost of $100 with a 
long life time( how long ?, long enough!). 

Now a monopolist will charge $6 to maximize his profit. 4 units will be sold.
The profit will be $16 per year. 

O.K. if we follow Parvin's scheme and build  a new plant, the best thing 
that could happen is that prices go to the competitive level,p=MC=$2). 
Then 8 units are sold. Neither firm is making any profits.

Consumers: the four consumers who were paying $6 are now paying $2, so they
are saying $16. Plus, four more consumers would now buy which they wouldn't
have done before. Theyare better off by a monetary value of $8 (the area
below the inverse demand curve and above p=$2 line and to the right of 4
units, i.e. (1/2)*4*4 = 8 ). So consumers are better off by $24.

If this were the case, then no firm would want to enter: it would
never recover its fixed costs.

Consumers are better off: by $24. 

The net surplus to ALL of society is $8/year which may be high enough
of a return on our $100 investment if the plant lasts LONG ENOUGH!,
or just say it costs less, we are in an ideal world here.

 
I don't remember all of Parvin's constraints, but this seems feasible enough.


This is the classic exapmle for government intervention. The problem is it
never works this way because all of the things left out in our ideal world
which I went into in the last post: political favors, unethical transfers(
especially from the poor to the rich), future uncertainty, entrepeneurship,
inability to measure( especially utility and demand curves), etc

At least Parvin's heart is in the right place: who doesn't want everyone
to have heat and food? (Maybe neo-fascists republicans). But the 
government is just not the solution. If it is such a good deal why can't
the people who are going to be so much better off, do it themselves
voluntarily ? Thats because when people do decide for themselves without
the use of force, they take all these things into consideration.
Sometimes they do it, sometimes they don't.No need for a government!!
Xref: sparky alt.politics.libertarian:706 alt.politics.marrou:1495