Corporations and welfare
Posted November 20, 2007on:
This cartoon tells us a number of things about the situation. Firstly, for Walmart to put this mans firm out of business, Walmart must have been relatively more efficient (ie, its costs were either lower or the value they added to the product was greater). Secondly, it tells us that the person that used to have a firm is worse off than he was when he did have his firm (as he now only makes enough to shop at Walmart, when before he could afford to go to boutique stores).
The first impression of most people to this cartoon would be to feel sorry for the guy, and say he was done over by a large corporation. However, it was the consumers choice to run off and shop at Walmart instead of his firm, and it was his ‘choice ‘ to sell his product at a price higher than the price charged by Walmart.
For an economist, the previous cartoon represents the tradeoffs that may occur in this case. Assuming Walmart is operating profitably we have a base where the owners of Walmart, and the consumers benefit from this firms introduction. However, our poor old store greeter is now worse off than he was, which implies that this change is not a Pareto improvement.
This is as far as positivist economics can take us. If we want to decide which situation was better, we have to make some type of welfare judgment. We need to be able to make a comparison of this mans loss of value from losing his firm to the rest of towns increase in value from being able to buy the same bundle of goods more cheaply.