The Economics of Welfare

Pigou, Arthur C.
(1877-1959)
CEE
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Editor/Trans.
First Pub. Date
1920
Publisher/Edition
London: Macmillan and Co.
Pub. Date
1932
Comments
4th edition.
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Part II, Chapter IV
RATES OF RETURN AND THE VALUES OF MARGINAL PRIVATE NET PRODUCTS

II.IV.1

§ 1. THE rate of return per unit in money obtained from any quantity of any kind of productive resource in any use is, in general, equal to the value of the marginal private net product of that quantity of that kind of resource there. As between different occupations and places, therefore, the relation between rates of return is the same as the relation between values of marginal private net products; so that equality or inequality among rates of return is the same thing as equality or inequality among values of marginal private net products. In this and the four following chapters I shall, for convenience, sometimes use the term of rate of returns—or, more loosely, returns—in place of the longer synonym.

II.IV.2

§ 2. Anybody who has control of any quantity of any form of productive resource will try so to distribute it among various uses that it brings him the largest possible money receipts. If he thinks that, apart from cost of carriage and so on, he can get more money by transferring a unit from any one use to any other, he will do so. It follows that the free play of self-interest, so far as it is not hampered by ignorance, tends, in the absence of costs of movement, so to distribute resources among different uses and places as to render rates of return everywhere equal. By an easy extension of the argument it can be shown that, where there are costs of movement, the free play of self-interest, again so far as it is not hampered by ignorance, tends, not to bring about equality in rates of return, but to prevent any divergences from equality in excess of those that, relatively to the fact that there are costs of movement, allow the sum total of returns to attain a maximum.

II.IV.3

§ 3. It follows that, if private and social net products everywhere coincide, the free play of self-interest, so far as it is not hampered by ignorance, will tend to bring about such a distribution of resources among different uses and places as will raise the national dividend and, with it, the sum of economic welfare to a maximum.*18 The distinctions drawn in the last sections of the preceding chapter show, indeed, that several maxima are possible, so that the one which self-interest tends to bring about need not be the highest maximum attainable. This, however, is a secondary matter. The essential point for our present purpose is that, when marginal private net products and marginal social net products coincide, any obstacles that obstruct the free play of self-interest will, in general, damage the national dividend. In real life, of course, marginal private and marginal social net products frequently do not coincide. In Chapters V.-VIII. this fact will be left out of account: but in later chapters, particularly Chapters IX.-XI., the consequences that follow from it will be fully examined.


Notes for this chapter


18.
The conception of the free play of self-interest must, of course, for this purpose, be taken to exclude monopoly action. Cf. post, Chapters XIV.-XVII.

Part II, Chapter V

End of Notes


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