Charles K. Rowley

The Social Welfare Function

The essential problem in assessing antitrust as a public policy instrument is to decide whether social welfare would be higher if an antitrust policy were to be implemented than if it were not. Such a decision is impossible until the value premises upon which social welfare is to be measured have been determined. The traditional starting-point in the economic theory of public policy is the Pareto principle, and it is worth outlining the value premises which underpin this approach before modifying the principle itself in line with recent discussions of antitrust policy.

Industrial Policy In The Mixed Economy

The mixed economy, for purposes of this paper, is taken to encompass, in varying form and degree, the economies of all non-communist societies. For purposes of comparison and contrast attention is here centred for the most part upon the mixed economies of the United Kingdom and the United States of America. In certain respects, this paper departs sharply from approaches which still dominate UK writings in the field of industrial economics, arguably with significant policy implications. Specifically, in Section A account is taken of recent developments in public choice analysis in analysing the actual policy interventions of governments and their bureaucracies, of recent developments in the economics of rent-seeking in analysing the actual responses of firms to regulatory initiatives, and of recent developments in the theory of property rights in analysing the predictable economic performance of corporate enterprise. In Section B, the paper explores the implications for industrial policy in its various aspects which are influenced by these perspectives and which render the development of an acceptable industrial policy ever more complex in the mixed economies. Some relevant proposals for long-term industrial policy are then outlined.

The control of industrial discharges to tidal rivers and estuaries

Abstract There has been far too much by way of a priori theorizing and far too little by way of empirical research into the economics of pollution both in this country and elsewhere. In this respect, the Royal Commission on Environmental Pollution itself cannot claim to be an exception, at least at the present time. Yet, if any real progress in the control of pollution is to be achieved a great deal of complex and time-consuming research of a case-study nature is absolutely essential. This, more than anything else is the message, in the case of industrial discharges to tidal water, to be derived from this paper.

Neo-classical Economics and the Case for Antitrust

The tradition of analysing the welfare effects of market power by reference to the concept of economic surplus as represented in the previously defined social welfare function is quite ancient, encompassing J. Dupuit (1844) and (certainly) Alfred Marshall. More recently this method has been used by Harberger [30], who was the first economist to use the concept of economic surplus to quantify the welfare effects of monopoly. The neo-classical approach to this issue, as outlined in Fig. 1, produced an unambiguous ‘deadweight’ loss of social welfare from market power and constituted a forceful case in favour of an antitrust policy.

Alternative Views on Social Welfare

The philosophy which underpins the social welfare function outlined in Section 2 of this survey is essentially that of the Pareto principle, with its concern for the welfare of all individuals in society rather than with some organic concept of the state, and with its emphasis that each individual in society must be considered to be the best judge of his own welfare. So extensive is the acceptance of this philosophy in economics that few economists would feel the necessity even of referring to these value judgements, which must be accepted before the public policy implications of Paretian analysis can have any relevance to the real world. This reticence is to be deplored, not least because the Paretian value judgements may well be less widely accepted outside than they appear to be within the economics profession. The implications of three alternative approaches to the antitrust debate are briefly outlined in this section.

Some Orders of Magnitude

The nature of the social welfare trade-off which is central to the antitrust debate has been outlined in purely theoretical terms in Sections 4 and 5 of this paper. What are the practical implications for the policy debate? Williamson [84, 85] derived some guideline orders of magnitude from the ‘naive’ trade-off model between scale economies and allocative inefficiency. Although these guidelines exclude X-inefficiency considerations, the latter are easily incorporated by treating cost savings as net of X-inefficiency.

Alternative Approaches to the Problem of Market Power

The merits and demerits of market power will clearly vary, both in character and degree, from one case to another, and for this reason a pragmatic cost–benefit approach to public policy might seem essential. Yet the cost–benefit approach to the market power problem has its critics as well as its advocates, and a range of alternative policies merits consideration. This survey restricts attention to four separate approaches to market power, all of which have been practised or are currently operational in the economies of the U.S.A. and the U.K., namely (1) laissez-faire; (2) fair-rate-of-return regulation; (3) cost–benefit analysis; and (4) non-discretionary antitrust. Although public enterprise is an alternative solution, it cannot fairly be treated in the space available. Many of the issues encountered in the regulations approach are relevant also for public enterprise. For the most part, discussion is at a theoretical level, with only illustrative references to past or to existing institutional arrangements. Throughout the discussion three separate aspects of the market power problem are carefully distinguished, namely (i) restrictive agreements; (ii) horizontal mergers and acquisitions; and (iii) single-firm monopolisation.

The Impact of Scale Economies

The constant cost assumptions of neo-classical economics were never widely accepted as a characteristic of the real world, and the possibility that scale economies might be sacrificed as a consequence of an effective antitrust policy was always recognised by economists actively engaged in the industrial organisation field. Only in 1968, however (Williamson [84]), was the possibility of a welfare trade-off between the cost savings from scale economies and the loss of consumers’ surplus from market power formalised within a social welfare function framework. In so doing, Williamson restricted his analysis strictly to the case of mergers, which provided simultaneously cost savings on the one hand, but prices in excess of the competitive level on the other. Williamson’s analysis is easily extended to the case of the entrenched monopolist and the possibility of corrective antitrust, and in this sense it may be viewed as being generally applicable to the antitrust policy debate. The essence of the Williamson trade-off approach to the monopoly problem can be distilled from Fig. 2.

The Relevance of X-Inefficiency

Textbook economic theory for the most part assumes that firms combine their factor inputs efficiently, thereby minimising production and distribution costs for any selected rate of output. This assumption seems to follow quite naturally from the basic postulate that firms set out to maximise profit, and in part for this reason there has been little effort made to justify the ‘cost-efficiency’ concept in the conventional wisdom of economics. Indeed, the cost-efficiency assumption held on virtually unchallenged and undiscussed through a period (1945–65) when just about everything else in economics was under reconsideration.

Some Theoretical Complications

It has proved convenient so far to evaluate the debate on antitrust policy by reference to the polar cases of perfect competition and pure monopoly. In this way important insights have been gained into the relevant issues in the antitrust debate. Nevertheless, these cases are not representative of real-world market organisation and it is now necessary to review the more important modifications to the trade-off analysis which are required once more realistic cases are countenanced.