Friday, August 3, 2007

The value of profit

Many people assume that non-profit means cheaper. Completely untrue.
Over time a for-profit enterprise will deliver the lowest price because only those who operate for a profit have an incentive to lower costs.

Certain charities may be able to overcome the lack of incentive to a certain extent.

Governments, however, cannot. Governments have the recourse to the use of force. Governments like to employ people; government workers tend to support the government.
Therefore, they actually have an incentive to make anything they do more expensive.

In addition, governments like to regulate, forcing the private sector to spend more money than is necessary.

This causes a rise in transaction costs and diverts resources that could be used elsewhere.

Which is also a big problem. Nobody notices the elsewhere. People just assume that if we didn't have this or that system in place things would be a lot worse.

Anyway, the for-profit enterprise has the right incentive to lower prices, to reduce cost, and to improve quality. That's what was really so amazing about the $0.94 pocketknife. I am still suffering a public school education so it seemed incredible the knife had the level of quality it did. It's not top flight by any means, but the quality/price ratio is astronomical on this knife.

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