Friday, December 4, 2009

Cost=Price Fallacy?

It seems to me that many suffer under the impression that, if they get rid of the price, they get rid of some or all of the cost. To produce anything takes resources, and while prices don't always reflect those costs exactly, they always track better than the alternative. Non-market programs are always wasteful, because no one has the incentive to remove the waste; rather they have an incentive to use all resources available to them and argue for more for the next fiscal year.

The entrepreneur however, has every incentive to reduce costs, because to reduce costs means better profit for him. Better profits for him short-term, because competitors will have to adopt his innovations or stop being competitive, which means this sort of competition drives profits down overall. Wonderful, cheaper stuff for all of us.

Sadly, people want to take precisely the sort of things we want to be cheaper, like healthcare, the environment, food, etc... and enact all sorts of laws. In many cases, they want to do away with price, sometimes stating certain things will be free, at other times weakening the price signal with subsidies, regulation or whatever. But cost is still there, most of the time going up because silly regulatory behavior raises transaction costs.

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