What do you like about the State?

[BCPVP]

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Of course, as you suggest the private enterprise can look at this high consumption and say "Golly, demand is huge and the congestion is hurting our product. We should raise our prices and cash in on the high demand and improve the product." But what's actually going to happen? Recall that the risk of congestion is not considered by the individuals making their supply/demand decisions. So when the price goes up, usage goes down, but profit also goes down because the company is really just moving to a different point on the same demand/supply curve that set the maximum profit point of $5. So their profit won't be maximized, so they will eventually be compelled to move back to the $5 rate by market forces. And the problem is right back - the resource is useless because the market drive for maximum profit pushes right to the "bad" result again.


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The problem in your example is that you left out consumer preference. If congestion is bad it is because the customers don't like it. Competitive modes of transportation will crop up if the consumers deem that the congestion is bad enough.

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What I tried to get across in the example is that the customers' preference for lack of congestion isn't reflected in the market balance point price because customers' don't actually adjust their individual behaviour to reflect this preference. Their inability to affect this preference for aggregate results with their individual behaviour leads them to exclude it from their decision making.

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Mosdef, why do you think there are usually more than one checkout lane in the grocery store?