Quote:
Originally Posted by Thematic-Device
You were applying the law and supply and demand and assuming perfect competition in a market where that does not occur. Water companies have a natural monopoly, for the simple reason that the fixed costs required to start up a water firm (lines to the house, treatment, etc.) make so that it is impossible to have two competing water firms.
Instead a private firm, seeking to maximize profit would supply where the Marginal Cost equals Demand, not where supply equals demand. This results in a less then optimal result. To address your other problems...
No actually the Law of Demand states
What you are talking about is elasticity of demand, and it should be noted that some products will have the same quantity purchased even if the price fluctuates (perfectly elastic) and in some products even the slightest raise will result in no products being purchased (perfectly inelastic). Most products lie somewhere in the middle.
Further there is the case of Giffen Goods, these are the goods which will increase in demand if their price goes up.
Giffen good - Wikipedia, the free encyclopedia
Whats more, Adam Smith argued for the creation of certain public institutions and quite validly. It is just as naive to think that the private sector will provide for everything and do so legally as it is to think that the government can manage the economy. Both are wrong, and both have disastrous results. |
I was not, in any way, assuming perfect competition. I argued that, as a result of the decreased supply, the price of water (on the free market) will increase. In my analysis, I simply said (un written)
Mutatis Mutandis and the price went to equlibrium. If you want me to describe how this happens, I can.
Your primary contention seems to be that "text-book theories" don't apply to real life. And I agree to a certaine extent. Many models, specifically in Macro books, ignore people and do all sorts of crazy equations to predict the future. This does not mean that every economic theory is invalid. If this were so, Economics would be of absolutly no use. If we are going to assume that humans do not behave according to the Law of Supply and Demand, we have nothing.
So, we have two alternitives.
1) People are not rational, that is, they do not behave according to the Law of Demand. In a case where people do irrational things, there is absolutly no use in having government or anyone else allocate resources because everyone is behaving according to a different logic.
2) People are rational and the Law of Demand desricbes their behavior. In this case, I have made arguments against government regulation.
So, either way, government regulation is needless and even harmful.