Just a nitpick, but one of the primary reasons for this is that Fedex is forbiden by law from charging less than some multiple of what USPS charges for similar services.
It seems we agree on the substantive issues here, but apparently mean different things by ‘laissez-faire’. Fair enough, though I’m not quite sure why you think that a marketplace in which the government says “You can’t do X” is a totally free market, even if the manner in which the government says that you can’t do X is one in which a free market-like incentive structure is maintained.
I don’t suppose you’d have a cite showing that private schools are shrinking in student volume or any other parameter relative to public schools that would show this trend? I’m not saying it doesn’t exist, but I’ve certainly never noticed it. Anyways, thinking that the government should be involved in boosting the level of production of education doesn’t necessarily entail a public school system. One would have to address that issue on its own merits.
Here you again fail to address the issue of positive externalities. Now I suppose you might simply be arguing that education doesn’t have positive externalities, but (1) I don’t see that you’ve made a case for that position, and (2) that would simply shift the issue over to something that more demonstrably does have positive externalities.
The issue, to restate it yet again, is that the benefits of education do not all accrue to the person who receives it. Now of course, many of them do, and even many of them that do not can be billed for, as it were. For example, my employer benefits from my education, but that is not a positive externality, since I will recoup that through higher wages than I’d get with less education. But the community at large also benefits from my education - I make more informed voting decisions, I contribute to public discourse in a more effective fashion, etc., and these benefits I cannot recoup. Of course, the societal benefits of any one person being educated are not great, but in aggregate they are substantial.
Now, the efficiency issue here is really quite simple. Suppose a unit of education costs $X. Now, if I am an economically rational agent, I will purchase education until the marginal utility for me of the next unit of education drops below $X. But since the marginal utility for society as a whole of me getting the next unit of education is higher than the marginal utility for myself, the equilibrium point on that marginal utility curve would be higher, and hence from the point of view of society, I’m consuming less education than would be optimal.
Let’s take another example: the sewer system. When I hook my house into the sewer system, I’m not the only one who benefits. My neighbours benefit, because I’m no longer dumping shit (literally) into the cesspool out back, stinking up the neighbourhood. The entire community benefits from a decreased likelihood of disease spread. But I can’t recoup anything for those benefits, and have to bear their costs myself. In fact, hooking my house into the sewer system is very much like an inverted pollution scenario. In a free market scenario, when I pay to have my house hooked up, I’m paying the benefits my neighbours receive from my actions, just as the polluter receives the benefits of the costs that his neighbours are forced to bear. Since the sum of the benefits to me and the benefits to society of my house being attached to the sewer system are obviously substantially higher than just the benefits to me, it stands to reason that supply/demand equilibriums are going to be substantially different depending on which perspective you’re looking at, and therefore that an unfettered free market will underproduce sewer systems.
Now, just because something has positive externalities doesn’t necessarily mean the government should provide it, as it does with sewers. Perhaps the positive externalities are small, in which case a small demand-side subsidy might suffice - say, a tax credit for puchasing that particular product. In other cases the positive externalities with respect to public health might be sufficiently substantial that the best solution is just a government monopoly, as is arguably the case for the sewers. Which would you prefer, some inefficiency in the city’s public works dept, or a cholera epidemic? The optimal manner of government involvement will, naturally, depend entirely on the context.
This seems an odd formulation. Are you saying that you derive no benifit from being able to engage in public discourse in a more effective fashion? Are you saying that you do not benifit from making more informed votes? etc.? I am not certain that this “externality” is really all that external.
You are saying that society will consume less education than it should. This seems to me needs more definitive proof. Can you link to a paper with more details?
Your second example seems to suffer the same problem. Can you please demonstrate how “*…the sum of the benefits to me and the benefits to society of my house being attached to the sewer system are obviously substantially higher than just the benefits to me…”? I cannot see this.
Thanks in advance.
It’s quite simple, really. In any transaction, according to economic theory, the economically rational agent does a marginal cost/marginal utility calculation, and only proceeds with the transaction if the marginal utility outweighs the marginal cost. But the rational agent is only looking at the cost that she herself bears, and the benefits that she herself receives. She does not take into account any costs borne by others, or any benefits received by others (unless of course those can be recouped, but then they’re already factored into her own marginal utility). This set of facts strictly entails that the economically rational agent will proceed with some transactions where the marginal cost to society as a whole is greater than the marginal utility to society as a whole (negative externalities), and will fail to proceed with some transactions where the marginal utility to society as a whole would be greater than the marginal cost to society as a whole (positive externalities).
This appears to be a retraction of the claim that a free market is always more efficient than a regulated market. Am I correct in reading your statement this way?
I completely agree that there may be many cases where there would be substantial benefits to using market-based approaches to regulation. The pollution credits scheme is undoubtedly one of them. This doesn’t mean that a pollution credit scheme is any less of a governmental regulation of the marketplace.
I think that it’s effectively impossible to deny that the existence of externalities conclusively demonstrates that completely free markets will, given the right (or perhaps I should say wrong) conditions, lead to substantially suboptimal outcomes. It appears to follow directly from the basic principles of economics.
Are you serious? Are you disagreeing that my neighbours benefit from me not having a cesspool in my backyard? You really don’t think they’re better off without the stench of human waste wafting over their property? Are you disagreeing that exposed raw sewage poses a public health risk, increasing the likelihood of communicable disease? Are you disagreeing that society doesn’t benefit from lower instances of communicable disease? Surely not.
And yet, I don’t benefit from the improved aroma of my neighbours’ yards. I don’t benefit from you not contracting cholera - or at least, I don’t benefit from that nearly so much as society as a whole does.
pervert, there’s a good, concise definition here if you want more than one wording of it.
That link doesn’t appear to be jumping to the correct term. You’ll have to scroll all the way to the bottom.
Right, granted, the government is less efficient than the market. But what I am debating here in the cereal example is if it is ten times less efficient than the market. If it is more efficient than this, then there is a net utility gain, despite the fact that the govt is less efficient at producing cereal.
Except I wager that’s not what happens. Cereal companies which decrease their marketing budget will suffer a loss in total profit as the loss of sales is greater than the gain in less marketing. The fact that the cereal industry has been structured in such a fashion means that either a) there is nobody in the cereal market smart enough to decrease their marketing budget, in which case, capitalism is doomed anyway or b) a high ratio of marketing to material costs in an inherent structural feature in some markets.
And just because you can point to the emergence of house brands doesn’t invalidate my point, it just shows that the cereal market is moving towards a different structural model, there are still plenty of other markets out there which follow the same model. Fine, forget cereal, what about cola?
Coke and Pepsi spend some billions of dollars each trying to convice consumers that their product is better. And so far, none of the smaller players who supposedly have an advantage of being able to sell lower cost cola have been able to break this ogliopoly. Why? Well, you might be able to argue that taste has something to do with it and nobody can replicate the imfamous coke blend. But all colas don’t taste all THAT different and some colas are pretty damn close to what coke tastes like. I’m sure if you gave out a blind taste test of colas, the number of people who prefer each cola would not be anywhere near reflecting the market share. It seems to me that marketing is a structural element of the cola market. To suceed, you NEED to spend a few billion dollars a year advertising.
So what if the government stepped in? The government now has a monopoly on cola and makes “government coke”, “government pepsi” and a few other random government flavours. The government doesn’t need to spend all but a pittance on marketing because everyone already knows about cola and nobodys going to stop drinking cola just because it’s not on TV. Seeing as coke and pepsi have been mixing to the exact same formula for the last mumble mumble years now (ignoring the new coke fiasco), I can’t really see how the government could possibly be horrendously bad at it. Get ingredients, mix them up, ship them out, at most it might be twice as inefficient. So, whats the end result, consumers don’t notice any difference, the taste is still the same and theres less annoying advertising on TV. In addition, coke now costs 10c a litre instead of $1 a litre. The government wins, the consumer wins, everybody is theoretically happy except the out-of-work marketing execs.
Yes, but you still dont understand that while a government might be making buggy whips when it could be making automobiles, the fact that it doesn’t need to spend any money on marketing means that it can make both automobiles AND buggy whips for less money that a commercial company could make just automobiles.
I didn’t know about the USPS example since I am not american but it was my understanding that USPS also competed in the package delivery arena for which it is a free market. Besides, there are hundreds of nationalised industries which, while they don’t run perfectly, still do a decent job. Roads are paved, water flows, potholes are fixed, garbage is taken care of, the trains run on time (mostly). Somehow the government is perfectly capable of handling these tasks without devolving into a morass of inefficiency.
If I said that in any way other than rhetorical then yes, I retract it. I dislike absolutes. I appologize if I got carried away.
Well, yes it does, if it simply extends property rights to provide incentives to control pollution. As you said, it simply makes the externality internal.
Well, yes, perhaps. If I could restate you, you are saying that there are some circumstances where a free market will lead to suboptimal outcomes.
Perhaps the debate should be about which issues represent such circumstances.
No, of course not. I am questioning the automatic assumption that such benifits are greater than the benifits to myself. Remember that I am a member of society.
Really? Your property values are not higher because your neighbors are? You do not benifit at all since the incidence of cholera is lower in your neighborhood? Surely not. 
The question I have is how can you say that society as a whole benifits more than I do. Surely if the cesspool was in my backyard I was at more risk of contracting cholera from it. Surely I was more likely to be offended by the odors. I can see if you add the tiny benifits up accross many people that you might come up with a large benifit. But that seems to be comparing bushels of apples with single oranges. Society does not seem to me to benifit more than I do on a per capita basis at least. And it seems a little unfair to compare the benifits or costs to society as a whole with mine. I still think I am misundestanding some basic part of this whole concept.
Thank you, Leonard. That is exactly what we were talking about.
I would like to pick a nit here. You seem to be saying that private cereal companies cannot reduce their marketing budgets because they have not. This seem to me the same circular reasoning free marketers are accused of in reverse. The only thing you can be sure of when you measure the amount of money spent by specific cereal companies on marketing is that those specific cereal companies spend that amount of money on marketing. It does not follow that such amounts are systematic to free markets. It certainly does not follow that such amounts will be optimum when market conditions change next week or next year. Which, BTW, is the main objection to simply handing cereal manufacture over to some government agency. How will they adjust when the market changes faster than the election cycle?
Sorry, perhaps I wasn’t clear enough in how I stated things.
The point is not that the benefits to society (not counting myself) are greater than are the benefits to myself. They may be, in this case, or may not, I’m not really sure. But the question is irrelevant.
The point is that the benefits to society including myself (let’s call these ‘global benefits’ in the interests of brevity) are greater than the benefits which are restricted strictly to myself.
Since the global benefits of my sewer connection include the benefits to me, they can only be greater than my personal benefits, never less. Since there are clearly substantial benefits that are not restricted to myself in this particular case, it seems pretty obvious that the global benefits are in fact much greater than my strictly personal benefits.
Again, the point of this is not that there won’t be any demand for sewer systems, but only that individuals’ marginal utility curves for sewer systems will be lower than our collective marginal utility curve for sewer systems. According to orthodox views of supply and demand, this entails that in an unrestricted market individually rational agents will reach equilibrium at a lower point than is collectively rational.
Well, yes, if the pollution credit scheme actually extends property rights to air. But I’ve yet to see one which does (and I don’t believe such a system would be practicable). So long as the “property” in question is just a tradeable right to pollute to a given degree, it’s just a government quota system. The fact that it mimics market behaviour resulting in efficient reduction of pollution doesn’t make it an unregulated market, since it wouldn’t exist absent regulation. The people bearing the costs of pollution still aren’t receiving offsetting benefits in voluntary transactions.
While the cereal example is being discussed, I’d like to add that the government could produce cereal and sell it minus the high cost of marketing without shutting down the existing producers. Continuing to allow competition with the government takes most of the steam out arguments against government services. Of course the trick would be to prevent the government from selling at a loss and making up for it in tax money. There may be need to pay for some things that way, but not something like cereal. I get really pissed off at city water/sewer, not because it’s a government service, but because they wont allow me to drill a water well on my own property or even get my own wastewater system, even if it was better than theirs.
Ok, this states the situation more clearly. I still see a problem. The problem is that the decision to have a sewer or not will be based on two things. The marginal utility to myself and my share of the marginal utility to society as a whole (normally included in my own marginal utility). The problem I see is that the marginal utility to myself seems to swamp my share of the marginal utility to society as a whole. That is, it does not matter very much that I am reducing my neighbors odor level because I am reducing my own so much more than any of theirs. Even if you add all of their benifits up, I still don’t care. I am reducing my own odor levels by such an amount that the other benifits seem to be swamps.
I suppose I am questioning whether or not society as a whole can be said to be a seperate rational actor in the same way that you and I can. It seems too much like the old rhetoric about “the good of the people”. Doesn’t the supply and demand curve assume some sort of society as a whole component?
No, I think you misunderstand. What I am saying is that the right to pollute becomes an inalienable right of every person. Anyone exceeding their quota is in essence stealing from those of us who do not. Similar to the way that unathorized copiers are stealing from artists*. such a situation would rely on governments, but only in the same way that owning a car relys on governments. A way, BTW, which is not incompatible with free markets the way many government regulations can be.
For the record, I have not seen a good system like this either. However, If I recall correctly, the kyoto protocols included something similar in the international level.
*Don’t start. I know many people disagree with this characterization. I am only using it as an example.
Except that you would need to restrict this new entity in such a way that it does not have access to the governemnt’s use of force. You might have to restrict it enough, in fact, that it would be indistinguishable from another private entity.
Because from what I’ve seen, a lot of people on this board have little or no understanding of business or economics. From what I can tell, most of what they know comes from anti-Globalization protest ralleys or…something…I don’t know.
case in point…
Markets do have an effect on all industries. Most of these industries are examples of monopolistic competition, oligopolies or natural monopolies. Basically, because of high capital requirements or infrastructure limitations, these industries have settled into one or a few large players that dominate the field. The market still affects these industries, just not in the same way as it would an industry in perfect competition. Or in other words, at some point, you will simply not buy a car, insurance or cable because even if you had to have it, you could not afford it. Even monopolies can’t set arbitarily high prices.
Regarding philosophy and morality - the market is simply a reflection of the needs and wants of the people. You can’t berate McDonalds for making people fat if people choose to eat it of their own free will.
If it had the power to use force, I think that would constitute shutting down the other producers pretty much. That would just be another run of the mill government monopoly. It probably would be indistinguishable from another private entity, except that it wouldn’t need to generate any profit after expenses were paid and you could eliminate the marketing or whatever quirk you thought the market really needed. Credit unions generally operate in this way. (It’s interesting to note that credit unions haven’t put for-profit banks out of business. I’d be really interested in finding why.)
Are you simply describing a non profit corporation?
I think you are.
Non profit entities exist all over the place for all sorts of purposes. They have not put for profit entities out of business because they do not have the same ability to generate investment capital. There are certainly other reasons, but that IMHO seems to be the biggest one.
Well, the sewer example is complicated by the fact that there aren’t really varying degrees of being hooked into a sewer system. Either you are or you aren’t, and as you say, even the strictly personal benefits of being hooked up will be sufficient to tilt the equation to ‘buy’. The way it would play out, presumably, is that it would result in a certain number of people with lower resources opting to do without, since while sewers are a high priority, they’d rank behind food, housing, and a few other things.
No. The supply and demand curve assumes individuals rationally maximizing their own utility. This is kind of fundamental to economic theory.
But the pollution quota exists solely because of govt regulations. The whole property thing is just a convenient legal fiction. There’s no real property, not even in the sense of intellectual property. I agree that it’s a market-like solution, but it’s still regulation, through and through.
The only difference is that the government would start it initially. Of course, you could just tell the people lobbying the government to start it, to go start it themselves, but I still think it would be vastly preferable to nationalizing the whole market. I guess I just don’t see the value in disallowing competition.
pervert: *No, I have not read every post in this thread. *
Oh. In that case, if you’ll excuse me, I’m not going to come back in to continue the discussion we were having, so if you were wondering why I’m ignoring you, I’m not. I just find it too confusing to carry on discussions with posters who’ve only read part of the thread.
In any case, you seem to have some interesting exchanges going now with other posters, so I’ll just follow along with those.