“The Government Can Do it Cheaper Because it Doesn’t Have to Make a Profit.”

By Paul L. Poirot

As any schoolboy knows, if there are two or more manufacturers of widgets supplying a given market, the one whose costs of production are lower will be more likely to profit from his work. And the one whose costs are higher may just break even or show a loss instead of a profit.

In markets for most goods and services, competition for customers tends to keep prices down. Each seller has to meet or beat competition pricewise if he expects to sell his wares. So, the one who can produce and market an item more efficiently stands the better chance of attracting customers and gaining profits. Profits, in other words, are not something a producer arbitrarily adds to his costs of production to arrive at a selling price. The selling price is determined by competition; and profits, if any, are earned by cutting costs and operating efficiently.

Now, it may be that there are so few willing buyers of widgets — so little market demand for them — that no producer could possibly make and sell them at a profit. So, there wouldn’t be any free-enterprise production of widgets. Whereupon, some widget enthusiast will come forth with the recommendation that the government do the job, arguing that the government can do it cheaper because it doesn’t have to make a profit!

The hard facts of life are that if customers really want something, the price they are willing to pay will be high enough to allow one or more producers to make and sell the item at a profit. But if there are no willing customers for an item, there will be no production of it unless the government forces someone to make and sell it at a loss, or else forces someone to subsidize its production or to buy it at a price higher than he’d freely pay.

Let us suppose that there is a demand for widgets, and that the price is high enough to afford one or more producers a profit. In all probability, there will be one or perhaps several less efficient widget makers just breaking even or showing loss instead of profit. Total production is enough to satisfy the market demand at, let us say, a dollar a widget. What if the government starts producing profitless widgets in this situation, and the price drops somewhat? Immediately, the less efficient widget makers are out of business — bankrupt. But the most efficient private operators may be able to sell at the lower price and still make some profit.

In any event, the profitable operators in any business are not the ones who keep prices high. It is the high-cost, profitless marginal producer whose costs of production have to be covered by the market price in order to call forth his limited output and thus balance supply and demand at that price. And that marginal, high-cost producer is always the first to be driven out when the government enters the business.

There is no evidence that any government ever has made a profit in any business venture. This is merely to say that economic activity is not within the competence of government. Indeed, it’s impossible to tell what the true costs of production are whenever government force is substituted for the interaction of supply and demand in a free market. One thing is certain: any taxpayer who believes that his taxes are too high is in no position to argue that the government can do a thing cheaper!