17.3 Capital Goods
This subject will be introduced by presenting two examples involving bread (rival
consumption good) and steel scrap (rival capital good).
17.3.1 Rival Consumption Good (Bread Example)
If we wish to allocate a single bread loaf among A, B, and C, what would be the best
allocation? Getting another bread would cost $0.70.
A would like to eat the bread and is prepared to pay $0.60;
B wishes the bread to make a sandwich and will pay $0.40 for it;
C wants to buy the bread at $0.30 to give to a poor hungry child, D, down the
street.
Using the principles above, A, who places the highest value on the bread, should
get it.
However D, although unable to pay, would be extremely happy if he could eat the
bread and satiate his hunger. The combined utilities of C and D might affect the
analysis: should the bread end up with D? Given that C obtains a personal value if
D (who is unable to pay) consumes the bread complicates the example. But what
exactly explains why or how C realizes $0.30 in value? Is it altruism or recognition
of helping to bring up a community of healthy, well-fed children? C might think of
reaping benefits in some way or another in the future. What about event sponsors?
The example tries to show the possible connected social value or surplus in the
allotment of rival goods, not that the exception overrides the rule. On the contrary,
the three principles are valid because
(a) as the goods are rivalrous in nature, they must be exclusively allocated,
(b) it is difficult (if not impossible) to determine valuations that depend on interdependencies such as described above.
As it is practically impossible to determine D’s benefit in eating the bread, the
market mechanism – although imperfect – remains the best because willingness to
pay does provide a suitable valuation to enable efficient rationing of rival goods.
17.3.2 Rival Capital Good (Scrap Steel Example)
Suppose a decision must be taken on how to best use some steel scrap.
A is a manufacturer of for domestic appliances, and is willing to buy at the market
rate of $400/tonne.
B is building high-speed railway systems and is willing to buy at $350/tonne.
478
17 Infrastructure as Public or Private Goods
This subject will be introduced by presenting two examples involving bread (rival
consumption good) and steel scrap (rival capital good).
17.3.1 Rival Consumption Good (Bread Example)
If we wish to allocate a single bread loaf among A, B, and C, what would be the best
allocation? Getting another bread would cost $0.70.
A would like to eat the bread and is prepared to pay $0.60;
B wishes the bread to make a sandwich and will pay $0.40 for it;
C wants to buy the bread at $0.30 to give to a poor hungry child, D, down the
street.
Using the principles above, A, who places the highest value on the bread, should
get it.
However D, although unable to pay, would be extremely happy if he could eat the
bread and satiate his hunger. The combined utilities of C and D might affect the
analysis: should the bread end up with D? Given that C obtains a personal value if
D (who is unable to pay) consumes the bread complicates the example. But what
exactly explains why or how C realizes $0.30 in value? Is it altruism or recognition
of helping to bring up a community of healthy, well-fed children? C might think of
reaping benefits in some way or another in the future. What about event sponsors?
The example tries to show the possible connected social value or surplus in the
allotment of rival goods, not that the exception overrides the rule. On the contrary,
the three principles are valid because
(a) as the goods are rivalrous in nature, they must be exclusively allocated,
(b) it is difficult (if not impossible) to determine valuations that depend on interdependencies such as described above.
As it is practically impossible to determine D’s benefit in eating the bread, the
market mechanism – although imperfect – remains the best because willingness to
pay does provide a suitable valuation to enable efficient rationing of rival goods.
17.3.2 Rival Capital Good (Scrap Steel Example)
Suppose a decision must be taken on how to best use some steel scrap.
A is a manufacturer of for domestic appliances, and is willing to buy at the market
rate of $400/tonne.
B is building high-speed railway systems and is willing to buy at $350/tonne.
478
17 Infrastructure as Public or Private Goods