Supply Side Economics - does it actually work?

[Master of Ossus]

There are actually lots of industries in which the economy would be very badly harmed by allowing them to operate in a true pure-market system. I'm not claiming that what we currently do is perfect (it's not by any means), but there are a substantial numbers of industries in which there would be a significant tendency to over- or under-produce.

I'd be curious to know just which companies\industries would either a)overproduce, wasting money on products they can't sell or b)underproduce and make less profit (I'm not saying that over\under production doesn't happen, but when it does its usually self corrected pretty quick)

Well, for one thing, every industry that produces ANY pollution will by definition over-produce, since pollution is a spill-over cost associated with the production of things. Specifically, minding over-produces significantly, as do most industrial fields. Defense and education are seriously under-produced, since they create spill-over benefits. Everything that's a public good (ie. transportation) should be subsidized since it has spill-over benefits for society.

Basically, these things NEVER self-correct. That's the problem with spill-over costs and benefits. The only effective way to deal with them is for the government to come in and levy taxes or subsidize the industry in question. There aren't a lot of options, when something like this happens.

I wasn't talking about over- or under-producing in terms of inventory. I was talking about producing at points nowhere NEAR the socially responsible or optimal levels at which they're supposed to produce. Those would never self-correct and would lead to substantial problems down the road, if allowed to continue.

[Falcon]

You cant judge an entire system by one isolated incident. A government official can make a bad production decision as easily (I'd say even more easily) than a CEO.

Im not making any judgements of an entire system. Just illustrating how things can fail, even in the best of systems.

obviously

[Master of Ossus]

There are actually lots of industries in which the economy would be very badly harmed by allowing them to operate in a true pure-market system. I'm not claiming that what we currently do is perfect (it's not by any means), but there are a substantial numbers of industries in which there would be a significant tendency to over- or under-produce.

This sort of spits in the face of the rationality principle, which is essential whenever you talk about economics. Which ones?

Actually, it fits quite well with the rationality principle.

If I only have to pay $100 to build something, and I create pollution that's going to cost $20 to clean up, the cost to society is $120, but I only have to charge $100 to cover my costs. If someone agrees to pay me $110 for each unit, I'm going to produce WAY more than society wants me to be producing.

[Joe]

I must have misunderstood you, I didn't think you were talking about externality issues.

If someone agrees to pay me $110 for each unit, I'm going to produce WAY more than society wants me to be producing.

No you're not, not if you can't sell it.

And pollution is a problem that can be attributed to kinks in the civil law system and governments allowing businesses/individuals/themselves to pollute on public property. The Eastern European countries, if I'm not mistaken, are substantially more polluted than their Western counterparts for the second reason.

[Master of Ossus]

I must have misunderstood you, I didn't think you were talking about externality issues.

If someone agrees to pay me $110 for each unit, I'm going to produce WAY more than society wants me to be producing.

No you're not, not if you can't sell it.

And pollution is a problem that can be attributed to kinks in the civil law system and governments allowing businesses/individuals/themselves to pollute on public property. The Eastern European countries, if I'm not mistaken, are substantially more polluted than their Western counterparts for the second reason.

No, that's the point. People are going to buy more of it than society as a whole wants them to. If they gain $110 worth of benefit out of it, they'll buy at $110, even though the pollution is costing more money to clean up, meaning that someone OTHER than the person buying the good has to pay for part of it.

[Joe]

In some industries, I suppose, but in many industries there's just no point producing that you exceed the demand for your product.

[Master of Ossus]

In some industries, I suppose, but in many industries there's just no point producing that you exceed the demand for your product.

Are you even reading what I'm posting? The problem with spill-overs is that the supply and demand intersect at a point DIFFERENT from where society's marginal cost-benefit curves intersect. The whole point is that consumers individually are going to demand more than society will, because they're not paying the whole cost of the good. If I had to spend $10 on something, and the rest of society had to pitch in $5 for each unit I purchased, I would be buying a lot more of that product than if I had to pay the full $15 price.

Similarly, education has spillover benefits. Someone buying a college education may have to plunk down upwards of $100,000, but society also benefits from that because college graduates are more capable of working more jobs than most people, and they have access to additional skills that improve the workforce and the country as a whole. Thus, education has to be subsidized in order to more properly balance its supply and demand with what society wants.

[Joe]

Hey, I AGREE with you about (certain) public goods, but it wasn't clear that that was your point from your first post. It sounded to me like you were talking about agricultural overproduction or something of the like.

And I'm not ignoring the whole spillover cost issue, I'm just saying that in MANY industries this isn't going to be a problem.

[Master of Ossus]

Hey, I AGREE with you about (certain) public goods, but it wasn't clear that that was your point from your first post. It sounded to me like you were talking about agricultural overproduction or something of the like.

And I'm not ignoring the whole spillover cost issue, I'm just saying that in MANY industries this isn't going to be a problem.

Which industry? Every single industry that creates pollution of any kind also involves some kind of spill-over costs. It won't be NOTICEABLE in a lot of cases, but frankly the issue is so large as to affect a substantial fraction of industries and prevent the transition to the full free-market system.