Last semester I took a Principles of Economics class. On the final, there was a question about a bridge that a company was considering building. The bridge had a large fixed cost, but required no variable cost. The question gave a demand schedule. Based on the demand schedule, there was no price that would make the bridge profitable. If you calculated the consumer surplus for the bridge with a price of 0, it was greater than the cost of the bridge. The answer the professor was looking for was that the government should build the bridge and provide free access.
I was wondering, what is the Austrian Economics solution to this type of problem? If the free market would still provide the bridge, how would it do it? If really precise price discrimination was possible, I could see the company providing the bridge. If it's not possible, how would the bridge get built?
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.
Can you explain more why the bridge can't be payed off with tolls?
If the project is profitable then the government doesn't need to do it; the private sector will. If the project isn't profitable than no one needs to do it; it's just a waste of scarce resources, a malinvestment. The answer to this question becomes obvious once you understand what profit is.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Based on the demand schedule, there was no price that would make the bridge profitable.
There are a lot of products that won't make profit - no matter what the price may be - due to the lack of demand. If the demand isn't there, why make it?
lol
(we need a facepalm smiley here)
In States a fresh law is looked upon as a remedy for evil. Instead of themselves altering what is bad, people begin by demanding a law to alter it. ... In short, a law everywhere and for everything!
~Peter Kropotkin
lol (we need a facepalm smiley here)
Great analytical argument there.
He should understand why I offered none.
Is it because you have none to offer, or the "lol" he left in response to a post of yours in another thread?
Sieben: Can you explain more why the bridge can't be payed off with tolls?
Here's an example. Say the bridge costs $2.1 million, and this is the demand schedule:
No price will cover the $2.1 million cost. BUT, if you add up how much all the consumers value the bridge, using the price they're willing to pay, you get a total value of...
150,000 * $7 = $1,050,000
50,000 * $6 = $300,000
100,000 * $5 = $500,000
100,000 * $4 = $400,000
200,000 * $3 = $600,000
200,000 * $2 = $400,000
200,000 * $1 = $200,000
----------------------------------
$3,450,000
That means if the bridge was provided for no fee, there would be a total consumer surplus of $3,450,000, which is greater than the cost of $2,100,000.
At no individual price point was the bridge profitable, but the benefits of building the bridge still outweigh the costs.
How can you say a "total consumer surprlus" is indicative of "benefit" to the market? The end result seems to be something like total potential revenue. Why is this unique to public goods? It should work for IPODs too. The model seems to be exploiting the fact that the owners can't charge multiple prices for their goods. But actually, they can and do all the time. Intel sells Dell processors cheaper than anyone else on the market. The only issue is transaction costs. But the argument from government makes the assumption that we can benefit from providing the road. If that's true, then acquiring (partial) ownership of the economy should be possible too. For example, if the road would boost the town's economic performance 20%, you could just buy enough baskets-of-shares in the town to where the increase in value of shares covers the cost of the road - you wouldn't even need to charge a toll for it...
In short, the model assumes a certain production and distribution strategy. This is just another "the market is too stupid to adjust" argument.
Sorry, my brain is not too smart today.
The government solution would necessarily be sub-optimal for people only willing to pay a few dollars in toll for the bridge. The $7 people would win, and the $1 people would lose. The key fault is in the aggregating of individual price-functions as if they are utility functions. Interpersonal comparisons of utility are lol. One solution isn't "better" than another. The market has to demonstrate through action what the best allocation of resources is. The government solution also neglects political costs of getting the government to do what you want it to do. I don't see why, since statists talk about market transaction and information costs all day, then turn around and assume government is a magic wand.
The example is nonsensical. Of course quantity demanded rises as price lowers, but that doesn't mean resources have been efficiently economized throughout the economic system. It only means that more important satisfactions were abandoned in order to appropriate the necessary resources towards the construction of a less important satisfaction.
Jonathan M. F. Catalán: The example is nonsensical. Of course quantity demanded rises as price lowers, but that doesn't mean resources have been efficiently economized throughout the economic system. It only means that more important satisfactions were abandoned in order to appropriate the necessary resources towards the construction of a less important satisfaction.
I think you missed the point. The question is not about the downward sloping demand curve... It is about consumer surplus being higher than the costs for a project, but the project still being unprofitable.
The government solution would necessarily be sub-optimal for people only willing to pay a few dollars in toll for the bridge. The $7 people would win, and the $1 people would lose.
That, I definitely see. Using taxes to build the bridge is definitely unfair for the people in the community who would never use the bridge. However, my question is not about the morality but of the efficiency.
The key fault is in the aggregating of individual price-functions as if they are utility functions.
Can you elaborate? I'm intrigued. Aren't prices the means of valuation in the economy?
I think you missed the point.
You missed my point. Price is not the same thing as value.