Monday, April 25, 2016

Antitrust Law and (not really) Economics

Some people are happy as can be that antitrust law has become the principal means by which neoclassical economics has wormed its way into our lives. Others long for the old days when the Supreme Court said efficiency is not all that counts.

As it turns out, efficiency is not everything or even anything to those who applaud the subordination of antitrust law to an ideology. The big problem is that conventional antitrust scholars talk a big game when it comes to efficiency but walk the walk, they do not.

There are many ways in which the intellectual hypocrisy reveals itself but let's take one example: externalities. Externalities is not just what law faculty do to each other as you might think if you ever read this blog. It is what businesses can do to all of us when they do not pay for all the resources they use.

For example, trucks speed down the road clogging the highway, causing stress and increasing the need for repairs. Smoke fills the air with one pollutant or another. Waste is dumped into lakes, rivers, and the seas. We all end up paying for it in terms of enforcing environment protection laws or by headaches, higher taxes, or lower property values. Yes, those business subject to the antitrust laws pay for some resources they use and we pay for some others.

But when it comes to deciding which ones are efficient, all the harm they heap on the rest of us is not part of the calculation.  Let's take one of my favorites, the Florida sugar industry. The are partially responsible for the destruction of the Everglades and manage to shift those costs to taxpayers. On the other hand, in the myopic world of antitrust economics, they may come out smelling like a rose. Ironically, it is because they are so good at shifting their costs to others.

Take some made up numbers. Two firms produce sugar. When they add up all their costs, production by Firm A is $1.00 a pound and by Firm B it is $1.25 a pound. Firm B just cannot compete at those numbers. But firm A is in Florida and damages the Everglades to the tune of $2 billion. Add those costs in and they are at $1.35 a pound. Firm B challenges the pricing of Firm A saying they are charging prices that are below cost (an antitrust violation if it means A will likely become a monopoly).  So is A more or less efficient than B? This is critical because many in the antitrust field worship at the toes of Mr. Efficiency. (Rhymes with Mr. T.)

 No economist or thinking person or beaver would say A is more efficient. What does antitrust law say? You guessed it. A is more efficient. And why is that? Because they actually paid less than B to produce. Did it cost less for them to produce? No. Did they use fewer resources than B to produce? No.

This is all because antitrust economists do not count the externalities. In the process they set up an interesting set of incentives. First is the race to the bottom as far as environmental ethics. Firm B can be more "efficient" if it too figures out how to shift its production costs to others. Second is the race to Florida or any other jurisdiction that makes a firm instantly more "efficient" and grants a form of antitrust "immunity."

1 comment:

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