fact, the only time this doesnât happen is whenâyou guessed itâthe government itself discourages, or even forbids, competition. There may be times when this isnât too bad (once upon a time, AT&T owned a government-granted monopoly on phone service, under the theory that nobody wanted a competition for building the most telephone poles down every street), but it is always to be regarded with skepticism.
Price. Noun. The payment made by one person to another in return for goods or services.
Prices donât have to be made in terms of money; barter, for example, can still serve to set a price for any particular exchange. Nor does a price have to be fixed. Auctions set prices based on the highest value that can be charged. Prices can be expressed as ânominalâ (dollars and cents) or ârealâ (as compared to another good or service). They can be stated as the balance point between the marginal utility and the marginal cost of a particular objectâthe benefit or cost of the last one bought or sold.
However, in a free market, the real significance of price is that it is the way in which sellers tell buyers how much they want of something. The immense power of price signals, all by themselves, to âdirectâ business decisions, is the reason that free markets are both better organized and far more productive than controlled ones.
Profit. Noun. An increase in wealth from any productive pursuit or investment.
You might think that âprofitâ is a pretty simple thing to define, whether youâre running General Electric or a corner lemonade stand: revenue minus costs. But nothing is simple once economists get hold of it. âCost,â for example, isnât just the five dollars you paid for the lemons and sugar at the supermarket; itâs also the value of something else you might otherwise have done with the same five bucks. In fact, itâs the value of the most valuable thing you might have done, which is what economists call your âopportunity cost.â
Which is why, when Blake and Scott assemble the ingredients for that hypothetical lemonade stand, their ânormal profitâ is not just the cost of the lemonade mix (the water, table, sign, and chairs arenât free, exactly, but are positive externalities ) but the value they put on spending that moneyâand their timeâon something else.
Regulation and deregulation. Nouns. Regulation is the process of controlling behavior, usually economic behavior, by rules, or any individual rule designed to do so. Deregulation is the elimination of one or more such rules.
Though regulation can be voluntary (as when an association tries to get its members to abide by a particular behavior), the term usually refers to the kind of rules that have the force of lawâthe regulations imposed by government to ensure a particular outcome that wouldnât happen in an unregulated free market.
Even a hard-core libertarian recognizes the need for some government regulation, if only to enforce contract laws. But as always with any government activity, anything worth doing is, soon enough, worth overdoing, and the various levels of government in the United States currently regulate construction permits, professional licenses (for everyone from surgeons to cosmetologists), advertising, the nutritional components of food, and the prices paid for literally thousands of commodities.
While there is a rationalization for every one of these regulationsâgenerally some amorphous conception of the âpublic good,â as when the City of New York proposed limiting the amount of salt in restaurant foodâthere are two profound free-market objections to regulation in general: First, governments are very bad at calculating the costs and benefits of regulationânot surprising, since the cost of regulation is almost entirely borne by businesses. This is why multimillion-dollar dams are hostage to the