From: "Tim Bomgardner" <bomgard@moose.cs.indiana.edu>
Subject: Is subsidization fair?
Organization: Indiana University, Bloomington
Date: Wed, 14 Oct 1992 13:13:54 -0500

Douglas Parvin writes:
}bomgard@moose.cs.indiana.edu (Tim Bomgardner) writes:
}
}>In article <parvin1.718922629@husc11> parvin1@husc11.harvard.edu (Douglas Parvi
}n) writes:
}>
}
}>}10 +
}>}   |\
}>} 8 + \
}>}   |  \
}>} 6 +---A
}>}   |   |\
}>} 4 +   | \
}>}   |   |  \
}>} 2 +---|---B-- cost of manufacture
}>}   |   |   |\
}>}   |   |   |\
}>} 0 +-+-+-+-+-+
}>}   0 2 4 6 8 10
}
}>} [discussion of profit when startup company is subsidized.  Firm A is the
}>   "established player", Firm B the startup.  Point A is what Firm A is
}>   "established player", Firm B the startup.  Point A is what Firm A is
}>   currently charging, Point B is the "break even" point.  At least,
}>   that's my interpretation.]
}
}>}No; these are the marginal costs that you are looking at.  It's quite possible
}>}that there is no profit to be made between A and B when the start-up costs
}>}are taken into account.  Firm A is not concerned with these costs.  Any
}>}firm wishing to compete is.  Your diagram ignores the cost of entry.
}
}>IF I understand what you're saying, then this is one of the most absurd
}>economic statements I've ever heard.  Firm A not concerned??  Au contraire.
}>Firm A has already paid the startup costs and is now attempting to
}>amortize that expense in the face of advice from economic wunderkinds
}
}I was very careful to say that the monopoly had to be "well established".
}What this translates to, in practical terms, is that its marginal costs
}are truly marginal costs.  That is, any "amortized" start-up costs have
}either been paid off by years of high profit,
}or are so negligible at this point to be left out
}
}>like you who've decided that "the people" have a "right" to purchase
}>goods and services in a market twisted into whatever you've abritrarily
}>determined is "fair and competitive."
}
}Don't you think it's a bit misleading to quote terms I've never used?

Yes, it is.  I'll be more careful in future.  My intention was sarcasm, not
direct attribution.

}In earlier posts, I defined exactly what benefits to consumers I was looking
}at, and how these benefits compared favorably to the costs of the start-up.
}So I fail to understand how I've been arbitrary.  "Fair" is a subjective
}term which I'll leave to the many categorical moralists.  Same goes for
}the word "right".  I don't invoke these concepts to illustrate my example.

But you do.  You have to.  Specifically:

1) It is arbitrary to declare that certain profits are "high", implying
   that they are also unfair.  At what point do profits cease being "not
   high" (and by implication, fair and reasonable), and become "high"?  

2) It is arbitrary to declare that certain costs are "negligible", implying
   that it is fair to not consider them.  Maybe they're negligible to YOU.

3) But let's assume they are completely paid off.  Those amortized costs
   represent risk rewarded.  Subsidization is the implmentation of the
   principle that it is fair to allow some, but not others, to avoid that
   risk.

4) You attempt to justify subsidization on the economic grounds of the net 
   "benefits to consumers".  The word "benefits", and the phrase "compared 
   favorably" require a basis in some standard of values.  Subsidization is 
   an attempt to achieve those values, i.e., to be "fair".

}What I've shown is that it's at least theoretically possible to increase
}consumer net wealth by an amount greater than the costs of subsidization.
}

Perhaps you intended merely to demonstrate that if you take (tax) $1.00
from me, you can (eventually) give $.10 to eleven other people.  Others have
argued the economic validity of that claim, but I'll assume it's true.  My 
concern is the underlying principle, which is that my property may be 
sacrificed at any time for any purpose that will "theoretically increase 
consumer net wealth".

}I'll leave it as an exercise to the reader to determine whether this fits
}in with your personal brand of morality.
}

It does not.

Tim Bomgardner