Just as we promised, once one leaves the world of many buyers, market-clearing prices, and no imperfections, things become awfully complicated. Furthermore, it must be conceded that one can always find a market imperfection if one looks hard enough. Take MONOPOLY for example. Virtually every business has some degree of market power. That is, almost every business could charge higher prices if it was willing to settle for fewer sales. The gas station on the corner. The neighborhood hair salon. The movie theater at the mall. Does this mean that the government should take over every business in the economy and regulate its price and output? If you answered yes to this question, then there's no point in reading further. Rather, may we recommend a fine, three volume work on economics called Das Kapital by Karl Marx. We think you'll like it.

Since the problem with monopoly is that the monopolist doesn't produce enough, a necessary condition for government intervention to improve society's happiness is that it force the monopolist to produce more. Most people don't believe that government regulation of prices would result in more output from gas stations, hair salons, and movie theaters. (Just imagine if the local beauty parlor were run like the Post Office.) On top of that, a vast amount of resources would have to be spent setting and controlling prices for so many companies. These are resources that could produce happiness doing something else. In other words, massive price regulation would be a prescription for pain with little gain. Accordingly, most people would agree that it probably is best not to price-regulate these firms.

So let's move on to a case where reasonable people can disagree. Let's consider the case of a privately owned subway (as in underground transportation) company in a large city. Here is a textbook example of a monopolist--a single seller. It seems reasonable to assume that a subway company--like J. D. Rockefeller's lemonade stand in Chapter 43--would have a significant degree of market power in setting its price. It could charge a very low price and get many riders. Or it could charge a much higher price and get fewer riders. As a result, it is likely that the fare that would maximize the subway company's profits would result in "too few" passengers. What should society do?

Regulation is certainly an option. A Subway Commission could be elected, or appointed by other elected officials, to regulate the subway's fares. Would lower rates result in more passengers? It's not so clear, is it? On the one hand, lower fares would mean that more consumers will want to ride the subway. On the other hand, the subway company would make less money. One way it could try to get its profits back up is to decrease the quality of its service. It could do this by spending less money on keeping its cars clean and attractive. Or it could spend less money on keeping its cars in good repair, increasing the risk of passengers being subject to inconvenient disruptions in service. Furthermore, the subway company might decide that the lower fares were not sufficient to maintain the frequency of its trips during off-peak hours. So it might cut back service during these times. Another possibility is that the company might decide that certain routes were unprofitable at the lower fares and cancel service to these areas.

On top of this, since the Subway Commission is politically appointed, it would be subject to the forces of CONCENTRATED BENEFITS AND DISPERSED COSTS discussed in the last chapter. That is, special interests might attempt to capture benefits for themselves at the expense of other citizens. How might this happen? For one thing, downtown merchants might find that frequent service to their store locations increased their profits. So they would lobby the Subway Commission to make sure that the subway made frequent stops in their part of town. Or residents from a particular section of the city would fight to make sure that service to their neighborhood was continued, even though the subway company wanted to cancel that service because it was unprofitable. What are we left with in the end? Do we think that the allocation of resources under public sector regulation will result in greater happiness than what would have resulted if the subway company had remained unregulated? Tough question.

An economist sympathetic to the working of unregulated private markets and distrustful of public sector intervention might reasonably come to the opinion that it was best to leave the subway company unregulated. While he would acknowledge the potential gains to society's happiness from lowering fares and encouraging greater ridership, he would also place great faith in the ability of the subway company's managers to find ways to subvert the lower fares by reducing service. On the positive side, he would have faith that the bus, above-ground train, and cab companies would all opportunistically attempt to steal away the subway's customers if it tried to raise fares too much. This economist would also be fearful that the influence of special interests on the Subway Commission would result in the subway company making resource transfers which actually lowered society's happiness, such as continuing service on routes that were unprofitable--something the subway company would never do in the absence of regulation.

How about an economist who was sympathetic to the benefits of government intervention? This economist would see the same things the first economist did. But he would likely believe that the gains in happiness from lower fares and increased ridership far outweighed any negative effects from service cutbacks and resource misallocations. Who's right? Let's just be honest here. Nobody can know for sure. Despite the fancy analyses that economists get paid to do in order to answer questions like this (and the more the money, the fancier the analysis), the fact is the ultimate answer depends on things that nobody can know. How many extra riders would ride the subway if the company charged lower fares? (How could we know until we actually lowered fares?) How will the company respond to the lower, regulated fares? (How could we know until we actually tried to lower the company's fares?) What will be the influence of special interests on the Subway Commission? (How could we know until a Subway Commission was actually established?)

Let's shift gears now and consider the case of a negative externality. Suppose a developer wanted to build a shopping mall close to a residential section of town. With the shopping mall would come increased traffic in the residential neighborhood. Residents in that neighborhood would be adversely impacted by the increased traffic. As a result, the shopping mall would impose a NEGATIVE EXTERNALITY. What should society do?

Once again, regulation is an option. In an ideal world, public sector regulators would determine the dollar value of the negative externality. They would then tax the mall an amount equal to the cost it imposed on residents. The developer would then consider this along with his other costs to determine whether it was profitable to build the mall. In contrast, what usually happens in the real world is that a Zoning Board, composed of or appointed by elected officials, approves or denies permission for the developer to build the mall. That is, the Zoning Board attempts to weigh out the (unseen) costs caused by the increased traffic against the gains society would receive from the mall.

An economist sympathetic to the working of unregulated private markets and distrustful of public sector intervention might reasonably come to the opinion that it was best to let the developer proceed unhampered in his pursuit of increased profits. This economist would recognize that the developer--by not internalizing the costs he was imposing on nearby residents--might make the wrong resource allocation decision. That is, the developer might go ahead and build the mall even though the net effect was to lower society's happiness. On the other hand, this economist would recognize that the Zoning Board might also make a wrong resource allocation decision. The Board might overestimate the costs of the (unseen) externalities and subsequently deny permission to the developer. On top of that, this economist would be fearful that special interests might influence the Zoning Board's decision. For example, residents in the neighborhood might have a great incentive to lobby the Board members to keep the mall from being built. Local merchants might band together to influence the Board so that this unwanted competition was prevented from "invading their territory."

And how about an economist sympathetic to government intervention? He would see all these things too. However, in contrast to the free market economist, he would be inclined to emphasize the benefits of controlling unwanted external costs from development. He would have greater faith in the Zoning Board's ability to accurately guess the relevant costs and benefits and to remain unswayed by the lobbying efforts from special interests. Who would be right? Again, an honest answer is that we just don't know. It's a judgement call.

There you have it. Now you know a major reason why "if you laid all of the economists from end to end they would never reach a conclusion." It's not that economists have different frameworks. Indeed, the main theme of this book is that there are not multiple frameworks for understanding economics. There is only one. The difference isn't in the framework. Its lies primarily in two subjective evaluations. So let's lay out these evaluations clearly.

FIRST, ECONOMISTS DISAGREE BECAUSE THEY DIFFER IN THEIR OPINION OF THE SEVERITY OF THE MARKET IMPERFECTION. How much below the socially optimal level is the monopolist producing? How much beyond the socially optimal level is the firm with the negative externality producing? Is the private sector producing too little of the public good? Because these questions cannot be answered objectively, reasonable people can--and will--arrive at different answers to these questions. If one believes that the market imperfections are not very severe, then one is led to a laissez faire position of leave well enough alone. On the other hand, if one believes that the private market is off by a lot, then one will want to seriously consider whether government intervention could make things better.

SECOND, ECONOMISTS DISAGREE BECAUSE THEY DIFFER IN THEIR OPINION OF GOVERNMENT'S ABILITY TO MAKE THINGS BETTER. Will price regulation of the monopolist backfire so that the end result is less output than what the unregulated monopolist would have produced? Will governmental restrictions on firms producing negative externalities be so burdensome that consumers receive too few goods and services? Will public sector provision of public goods result in so many "forced riders" that the public sector allocation is worse than the private sector allocation? Finally, will special interests use their political influence to exploit government oversight of the private sector for their own gain at the expense of society's overall happiness?

The great value of the economic way of thinking is that it leads one to ask the right questions. The answers to these questions, however, are open to debate. They oftentimes depend on factors that are unknown and unknowable. In the final analysis, each individual must come to their determination of the proper role of government.