Production’s Dark Clouds:
Concerns for Firms
The Eternal Question…
• best way to produce goods & services to
satisfy society’s needs/demands?
• “free market” competition for profit?
• government planning & delivery?
Is Bigger Better?
“People of the same trade seldom meet, even
for merriment and diversion, but the
conversation ends in a conspiracy against the
public, or in some contrivance to raise prices.”
Adam Smith
• Modern industrial production is “capital-intensive”
• Can be more efficient (“econ. of scale”)
BUT
• results in fewer, very large producers (oligopoly)
• normal market behaviour results in less
competition – less pressure to keep prices down
• increased risk of collusion – benefits of efficient
production more likely go to the firm (profits) rather
then to consumer (lower prices)
• Successful firms often use profits by
purchasing competitors (“mergers”,
“acquisitions”, “takeovers”, “buyouts”)
• reduces risks of competition by controlling it
• reducing production of goods/services by
closing competitor after buying it
Case: Canada’s Banks, 1990’s
• Several major Cdn banks explore merger
• RBC & BMO, CIBC & TD
• achieve size needed to “compete globally”
• Fed. Gov’t blocks merger – concerned it would
reduce competition and availability of services
in domestic (Cdn) banking market
“Third Party” Costs
• Profit-seeking behaviour = minimize all costs absolutely
• Markets not good at internalizing costs (passing all costs of
production on to consumers)
• Seek to externalize as many costs as possible
• Ex. pollution passes on environmental costs of production
to others
• Non-monetary costs called “social costs” or “third party
costs”
Case: English Wabigoon First Nation
• N. Ontario in 1970’s
• Pulp mills on English R. discharge mercury-laden
effluent into water
• Wabigoon First Nation downriver consumes fish
from river – mercury bioaccumulates
• First Nations experience high levels of mercury
poisoning/death
Public-Private Balance
• Gov’t also not a totally efficient provider of
goods/services
• 1960’s: growing population, belief that gov’t
can provide essential services better than free
market (ex. of “missing markets”)
• Gov’t expands role as producer of “essential
services” (education, health care)
• 1990: gov’t spending “out of control” (spending more $
than taking in in revenue)
• Annual deficits, public debt grow at alarming rates
(who will pay it in future?)
• Gov’ts respond by “downsizing”, “right-sizing”
• cut spending, payroll, services
• Privatized, deregulated markets (ex. hydro)
• “mistakes were made”
Case: Walkerton, Ont. , May 2000
• Gov’t cuts to Ministry of Environment budget
force reduction in staff needed to monitor
water quality
• Municipal well at Walkerton contaminated by
farm runoff (e-coli)
• Hundreds fall ill in Walkerton, 7 deaths
Food for Thought…
• Should we go further and invite more
participation of private companies in the
delivery of social programs?
• Should we be wary of turning essential social
services over to firms whose main motivation
is profit? (ex. health care?)