Edited to add: The original version of this post was marked up wrong, causing it to jump from the middle of the first paragraph to the middle of the fourth. That presumably made it seem pretty incoherent. It’s fixed now. If it made no sense to you before, I hope you’ll give it another shot.
If you read a novel a month, then Anthony Trollope, Philip Roth and William Faulkner (my three current favorites) should be enough to get you through the next 8 years. At that point you can start in on Dostoevsky or (if your memory is like mine) go back to the beginning and it will all seem new again.
There are in the world, far too many superb novels to read in a single lifetime, which makes it pretty hard to justify writing new ones. Even the best of contemporary novelists might well be more usefully employed as, say, an exterminator.
Yet successful novelists receive great rewards that encourage them to continue writing. That’s what we call a market failure — a case where price signals have failed in their mission to direct resources (in this case the novelist’s time and effort) to their most valuable uses.
You can, for example, get the Kindle edition of Faulkner’s Absalom, Absalom! for about $8.50. For the same $8.50, you can get the Kindle edition of, say, Sarah Gruen’s Water for Elephants. Either way, you’ll read a terrific book. But if you fork over $8.50 for Gruen’s book, she and her publisher get the message that they’ve given you at least $8.50 worth of value, and they should keep it up. That’s an illusion, because it ignores all the value that was lost when you bypassed the Faulkner.
To put this another way: Your willingness to pay for Gruen is determined by the value that you get from reading a book as opposed to not reading a book. But the social value created by Gruen is determined by the value that you get from reading Gruen as opposed to reading someone else. That social value is, most of the time, far less than your willingness to pay. But the reason markets work so well is that — most of the time — willingness to pay is an accurate gauge of social value. In this case it’s not, so there’s no reason to trust the market.
If it’s hard to justify writing new novels, it’s harder still to justify a system that encourages others to write them.
Because I’m a fan of Sara Gruen, I might well read her next book — and I might even enjoy that book a hair better than whatever book I’d have read instead. But people should not reap great awards for making other people’s lives just a hair better.
We could solve this problem with a hefty tax on contemporary fiction — though you might be squeamish about such a tax, and if called on to explain why, you might use words like “liberty” and “freedom”.
Now let’s talk about carbon emissions. These, too, represent a market failure. Firms produce valuable products (as Sara Gruen writes valuable novels) that nevertheless cause a great deal of carbon-related damage (as Sara Gruen nevertheless causes a great deal of damage to Faulkner’s estate, or to the writers she displaces). Those firms, like Sara Gruen, are rewarded for the good they do but not punished for the negative side effects of their choices. Therefore, they — like Sara Gruen — are encouraged to overproduce. Policymakers have it in their power to remedy that situation via taxes. These are not dissimilar situations.
So:
Question: How do you justify taxing carbon emissions without also taxing novelists?
Let me head off the obvious (but I think faulty) rejoinder that the carbon emitter is intruding on his neighbors’ property rights while Sara Gruen is not. Here’s why I don’t buy that: When we talk about setting policy, we’re implicitly talking about how property rights should be allocated in the first place. When we tax the polluter, we’re declaring that his neighbors have a property right to carbon-free air. If we tax Sara Gruen, we’re declaring that the Faulkner estate has a property right to the attention of potential readers. Neither of those property rights exists ab initio. Instead, they’re created by policies. So a claim that there’s a relevant property right in one case (but not the other) is not an answer to the question; it’s only a rephrasing of the question, viz: “Why is there so much clamor to create and enforce one property right but not the other?”
It is possible, perhaps, to understand why self-interested parties have found it worth their while to fight for carbon taxes but not for authorial taxes. My question is whether there’s a principled reason to tax polluters but not novelists. Anyone?
You are, of course, wrong in stating that the consumer does not expect that she will value reading the Gruen book at at least $8.50. If that were the case, she would not be willing to pay $8.50 for it. If she would also value reading the Faulkner book at more than $8.50 she would buy that too.
As you have implicitly noted, for most of us the opportunity cost of the time it takes to read a novel is by far the largest component of the price of that novel. The relative costs of a Gruen book and an out of copyright ebook is not, as you assume, $8.50 versus $0. It is more like $1,008.50 versus $1,000.
When you consider the actual cost of purchasing a novel, it is easier to intuitively see how an author can create $8.50 worth of value (or more) by writing a novel you enjoy only slightly more than the alternative.
Your claim that there is a market failure because novels are perfectly fungible is wrong. If your assumption that novels are perfectly fungible were correctly, you would expect to see a few ebooks selling in vast quantities at a very low price. The fact that this does not happen shows that your claim is wrong.
A polluter is a good example of market failure but a successful novelist is not.
Let me put a question back to you: I’m wondering why you consider taxing the author, but not alternatively abolishing copyright laws? In other words, let the surplus value go to the buyer instead of the state. Then people would buy the right amount of books.
As you say, every new book and every new song contributes little value to society overall. But the deadweight loss caused by people not buying books (and to a higher degree music) that they would’ve bought at a lower price, is huge.
So if you can argue for a novelist tax, then why couldn’t you also argue for an abolishment of copyright?
The damage caused by carbon pollution is cumulative over time (i.e. A little carbon is fine, but more is not, and even more could be extremely bad). This effect is somewhat reversed for authorial externalities: every new author who publishes a book and pollutes the dead author estate space is doing so by proportionally less each book they publish. Book n takes more proportionally out of Faukner’s estate than book n+1.
Along these same lines, there’s more uncertainty about the future of fiction than about carbon emissions; greater risk aversion might be warranted.
Interesting question. They feel very different situations, but is there actually a valid distinction – in principle. A fallback position might be based on magnitude of effect – intervening in the market should be done only with caution, and the magnitude of the author effect makes it not worth it, whereas the magnitude of climate change makes it worth it. This would be to acknowledge that there is no difference in principle, and I am not sure that is right.
Another justification would be if there were some extra social value added by contemporary books over and above reading pleasure. There is some extra value in being new – these books can deal with subjects and situations that older books cannot deal with, and allow people access to ideas about contemporary issues. They may facilitate society dealing with contemporary issues better.
What would happen if if we were to introduce a “contemporary” tax; how would it work? Perhaps we would have a sliding scale – say 50% for this years books, 40% for last years falling to 0% for 5 years old, by which time the “new” has pretty much worn off. This would encourage the reading of older books, and discourage the production of new books. The sale of hardback books suggests that people will still buy new books, even at an inflated price.
I must be missing something. In the example of the authors you say Sara Gruen causes a lot of damage to the authors she displaces. Isn’t this just competition. We don’t tax Samsung for displacing Apple products.
Steve, two possibilities:
1. The difference between the two case may be the issue of negative rights vs positive rights. People think that other someone can’t poison you with polluted air, because that would a negative rights violation. In contrast, they have no problem with someone out-competing you, because a right to readers’ attention would be a positive right, and they don’t believe in positive rights. And more importantly, they don’t believe in the positive right of the rest of us in society to reap the benefits of the contributions to the economy that Gruen would make if he weren’t wasting his efforts on competition with Faulkner’s book sales.
2. Another distinction you can make is a sin of commission rather than omission. The reason we’d be taxing fiction is NOT to protect Faulkner from Gruen, because Faulkner’s losses are compensated by Gruen’s gains. Rather, the reason is that we’re upset that Gruen isn’t contributing as much to society as he could be. That’s a sin of omission, which people may not care much about. But a polluting factory would be presumably committing a sin of commission: they would be actively doing harm to someone with their polluted air. So people may view the actions as being in fundamentally different moral categories. (They’re not consequentialists like you.)
A deontological answer: in the case of air pollution you’re creating a property right out of a commons; in the case of novel attention you’re just “reassigning” an already-existing right. (Not from new novelists to old, but from readers to old novelists)
A utilitarian answer: what happens in a world with no pollution controls? A billion-way Prisoner’s Dilemma and a lot of sadness. What happens in a world with no novelist tax? A slight overproduction of novels which turns out to be self-limiting (as new novels fail to compete with the increasing base of existing novels).
I should add that the commission/omission distinction bears a lot of similarity to the negative rights/positive rights distinction.
From #7, pollution is a problem due to the tragedy of the commons – it could in theory be resolved by ownership. If someone owned the atmosphere and could be sued for any damage it caused I think they would be charging a carbon disposal price for dumping CO2 in the atmosphere. What would be the equivalent ownership for books?
I dislike the positive/negative rights breakdown (Keshav and others), since that usually breaks down on closer scrutiny to again just be an arbitrary assignment of what is considered common and what is not.
If I may suggest an intermediate example which may be a bit more intuitively understandable (although neither is more valid, I believe) than “pollution” from novel writing: the market for text books.
The major battle of my education was trying not to waste the time studying from poor textbooks, and unlearning misconceptions promoted therein. Picking the right material to study from a-priori is one of the hardest things to do.
I once (half-seriously) suggested a scheme whereby if you wrote and published a text book, you should also sign up for automatic extermination afterwards — subject only to sentence communication by your readers.
So, now, do you have a “positive” right to compete for physics students’ attention and the shaping of their understanding when you know you are not on the league of say, Feynman, in either teaching, insight or knowledge?
You may say you offer choice, and may the best author win — but in that case you are still consuming/polluting a common resource — the price discovery (quality discovery?) mechanism.
I tend to agree with Nathan’s first comment, particularly the situation where you treat the experience of reading a novel as fungible. I would also add that there is additional (perceived) value in discovering a new novelist one likes. Given that a deceased novelist’s output is fixed, you know you can exhaust that value. Discovering a new novelist you enjoy opens up the possibility of future output you will also enjoy. Even if I enjoy a hypothetical Faulkner and a hypothetical Gruen book-qua-book exactly the same amount, I would still value the Gruen book more highly as a new discovery.
In this sense I think the market is functioning somewhat more correctly by promoting new novelists. If you believe your customers will value product N more than product O doesn’t it make sense to promote N?
>>These, too, represent a market failure. Firms produce valuable products (as Sara Gruen writes valuable novels) that nevertheless cause a great deal of carbon-related damage (as Sara Gruen nevertheless causes a great deal of damage to Faulkner’s estate, or to the writers she displaces). Those firms, like Sara Gruen, are rewarded for the good they do but not punished for the negative side effects of their choices. Therefore, they — like Sara Gruen — are encouraged to overproduce.<<
But they *are* punished for the negative side effects of their choices – high-emission firms pay more taxes.
I concur with Nathan – novels are not nearly perfectly fungible (outside perhaps of the junk romance novel market).
Your claim that Faulkner’s novel offer greater value than Gruen’s is purely subjective.
Tastes change over the years, and a great author may be of little value to a modern consumer if he wrote on subject matters that few today care about.
Take the market for zombie literature, for example. This market has been sadly neglected by the likes of Faulkner, despite the huge popularity the genre has enjoyed over the last several years.
Many deeply mediocre authors have made a lot of money despite their lack of talent.
THAT is market failure. I would like to know what measures could be taken to improve the quality of zombie literature, which I (and many other readers) tend to find dissappointing.
I don’t think there was a claim that Faulkner offered greater value, just that the added value of Gruen is much less than the cover price. Once a book is written, it costs very little to reproduce it. Markets usually work because the resource is scarce. In such a market for novels, a popular novel would become scarce and the price would rise. This perhaps raises the question of why popular novels are not priced higher.
“Your willingness to pay for Gruen is determined by the value that you get from reading a book as opposed to not reading a book.”
NO IT IS NOT!!!
My willingness to pay for Gruen is everything else I could do with that cost, INCLUDING READING OTHE BOOKS IF I CHOSE TO.
Nathan:
Your claim that there is a market failure because novels are perfectly fungible is wrong. If your assumption that novels are perfectly fungible were correctly, you would expect to see a few ebooks selling in vast quantities at a very low price.
And this is not so far from what we see. A small number of big best sellers, along with a whole lot of also-rans. The huge rewards to the best sellers attract lots of entrants, hoping to make it to the top. Because there are such a large number of entrants, we should not expect the difference between the best and the second-best to be very large.
PS: You are, of course, wrong in stating that the consumer does not expect that she will value reading the Gruen book at at least $8.50.
You are, of course, wrong in thinking that I stated this.
This actually *is* the sort of thing some progressives argue should be taxed.
Robert Frank, for instance, makes arguments for progressive taxation based on winner-take-all professions. These are defined roughly as professions where the most talented few earn very large incomes, but most entrants earn very little, and would do better with a lower risk, more socially useful career. It’s been years since I read the Winner Take All Society, but he generally points to industries like entertainment (athletes, actors, musicians) and investment banking. It’s particularly easy to understand with entertainment, where national or global distribution has become very cheap, so the very best in the world have largely replaced the market for merely good local stars (I believe he says something like, who needs a fourth tenor?). Further more, each new entrant lowers the success probability of all existing entrants, which is a negative externality. More recently, he has targeted high frequency traders (what’s the social value of being able to trade a few nano-seconds faster?). Novelists are obviously similar to entertainers in that most novelists are failures, with a few superstars becoming wildly successful.
Anyway, my point is that highly progressive income taxes are supposedly the solution to the problem you state, which is to steer resources from the high risk / high reward, “tournament” style professions, toward lower risk, more productive and socially-optimal careers. So yes, there are people who basically argue to use taxation to discourage the writing of novels.
Note I am not making this argument myself, just pointing out that it exists.
Dave B:
I must be missing something. In the example of the authors you say Sara Gruen causes a lot of damage to the authors she displaces. Isn’t this just competition. We don’t tax Samsung for displacing Apple products.
Yes, you’re definitely missing something. Samsung and Apple do not produce products that can be replicated at zero marginal cost. If you don’t see that this is critical to the argument, then you’ve not understood the argument.
In the Arm Chair Economist, you essentially made the same argument about that book. I was just as puzzled by that argument there as I am about the same argument here. I was willing to pay for not just one edition but two editions of your book. Why are you so willing to dismiss my choice to buy two very similar copies of your book rather than buy a copy of Absalom, Absalom and a copy of Water for Elephants or to buy a ticket to a baseball game? My choice was quite rational. Who are you to say otherwise or to say that the market (as expressed by how I spend my dollars) is irrational?
How important is the “zero marginal cost” distinction? Yes, the new author incurs avoidable costs when competing with Faulkner’s sunk costs, and potentially the new book buyer incurs avoidable costs by buying a newly-printed book rather than buying a book off the shelf (or already digitized). But as far as I can tell, these additional costs are entirely internalized. The new author/publisher incurs all the costs and risks of the new creation, and the buyer incurs the cost of his or her own consumption.
This scenario contrasts with CO2 emissions, wherein the parties do NOT bear the costs of their decisions – thus warranting remedial action.
True, the new book author, publisher, and buyer impose costs on the Faulkner estate. But these competitive costs seem no different than the costs that the new physician imposes on existing physicians, or the new homebuilder imposes on existing homebuilders – or the new patient imposes on existing patients, or the new homebuyer imposes on existing home buyers. In other words, at this point in the argument, the “zero marginal cost” part seems irrelevant.
It sounds like you don’t agree with the first welfare theorem (the version where we just look at consumer and producer surplus in aggregate) OR you think monopolies and monopolistic competition result I deadweight loss (since the books are marked up above marginal cost).
Not sure what makes books different from candy bars, courses at. Oege, movies, meals, gasoline, cars or prostitutes.
Steven:
If novels were perfectly fungible then, unless there is an amount of price-fixing which seems highly implausible, would you not expect the price of books to be the marginal cost of distribution? If Dan Brown could take all of Steven King’s sales by lowering his price by a cent you would expect him to do so. The fact that there are vast rewards available to best-selling novelists, as you note, is inconsistent with your implicit assumption that novels are perfectly fungible.
Your implicit claim is that there are more books of equal value available than a person can ever hope to read. If this is true, then it looks to me to be a situation of perfect competition and price should be bid down to marginal cost. The actual prices we see only seems to be compatible with monopolistic competition, which is inconsistent with your assumption that all books are equal.
Your claim that due to the large number of entrants you would not expect the difference in quality between the best and second best to be very large is not inconsistent with Gruen creating $8.50 in value by writing a slightly better book than Faulkner. If you accept my claim that the opportunity cost of the time involved in reading a novel is $1,000, then Gruen’s book could be less than 1% more valuable than Faulkner’s and create more than $8.50 in value.
Given the large number of quality out of copyright books available for free I think your statement that Gruen does not create $8.50 in value is equivalent to saying the consumer does not value reading the book at at least $8.50. If Gruen’s book is not $8.50 better than other books then the consumer could read Shakespeare or any number of other authors for free instead of paying. Or read Shakespeare for free with a coffee and box of donuts.
Dave B – Here, I think, is the key importance of cost to produce the item:
marginal amount of social value created = max price you are willing to pay – min amount producer is willing to receive – max price you would have paid for substitute item + min amount producer of substitute item was willing to receive.
Call each of these terms A, B, C, D.
So marginal social value is E = A – B – C + D. Market is efficient if marginal social value is roughly equal to producer’s profit, i.e. if E = A – B. Note that in the case of e-books, A & C are roughly $8.50, while B & D are each roughly $0. So E = 0, A – B = $8.50. Not efficient. In the case of iphones, A, B, C, D are all roughly $200, so E = A – B = 0, hence efficient iphone market.
“Schumpter’s felicitous term ‘creative destruction’ is exceptionally useful because it offers both a clear message and stimulating ambiguity. Its clear message is the fact that innovation and growth force obsolete technology to be swept away without hesitancy or remorse. Marx and Engles’s earlier discussion of the macroeconomics of industrial growth in the Manifesto of the Communist Party introduced this argument….
Schumpeter, an unapologetic admirer of Marxian growth analysis, simply extended the idea to the related microeconomic issue – the replacement of obsolete products, processes, and firms by their more up-to-date and superior successors.
* * *
Until recently, most economists writing on the subject, from the viewpoint of economic efficiency, held that the substantial spillovers of innovation probably cause considerable underinvestment in innovative activities because as we have seen, much of the benefits of innovation goes to people other than those who have devoted the effort and resources required to create it. However, more recent writers – notably Aghion and Howitt (1998) – have raised the opposite possibility. They argue that because the inventors and entrepreneurs who create the pertinent innovations and those who suffer the resulting destruction are often different individuals or groups, the process entails an externality that tends to induce overinvestment in innovation by inventors and entrepreneurs. That is, an individual considering investment in the design of a better mousetrap may ignore the social cost that will be entailed in the resulting obsolescence of earlier-model mousetraps because they are supplied by others, who will bear the resulting financial loss….
* * *
I argue[] that innovation spillovers are the source of vast benefits for society. These benefits, however, are counterbalanced by their accompanying disincentives for innovative activity. The externalities stemming from creative destruction – and the stimulus for innovation that they provide by exempting innovators from much of the damage entailed in rendering earlier technology obsolete – strengthen this conclusion.”
William J. Baumol, The Microtheory of Innovative Entrepreneurship (2010) at 129-30.
@3:
”The damage caused by carbon pollution is cumulative over time (i.e. A little carbon is fine, but more is not, and even more could be extremely bad). This effect is somewhat reversed for authorial externalities: every new author who publishes a book and pollutes the dead author estate space is doing so by proportionally less …. ”
That’s not only an important point, but there’s a generalization of this. Because the damage done by a new book involves cannibalizing the sales of an existing book, not only is there a case of diminishing returns for damage, but there’s also a maximum cap. The size of the damage that new books can do is limited by the size of the existing book market. Furthermore, the damage caused by selling new books and the benefit to the public are similar types of things that are easily comparable.
The damage purportedly done by carbon emissions can conceivably outstrip the potential benefit on an overall level, as well as on an individual level, and involves a different type of damage than the gains produced by emitting carbon that can’t be as easily balanced.
I wonder how much of the value of reading a book is the opportunity to tell others “you should really read X”, e.g. new works offer additional signaling value that one is up on current trends much like new clothing fashions.
What about counting the $1000 time cost, or weakening copyright protection in lieu of taxing authors?
I understand that Steve’s argument pivots on a zero marginal cost of production but the first thing I thought of when I read the post was the translation of Mankiw’s principle #2 in this article:
http://www.improbable.com/airchives/paperair/volume9/v9i2/mankiw.html
Again, I know this does not exactly apply, but anyone who has not read/seen this skit needs to.
Steve white:
It sounds like you don’t agree with the first welfare theorem
One cannot reasonably disbelieve a theorem! Nor, of course, can one reasonably attempt to apply a theorem in a situation where the hypotheses don’t hold.
I think you’re assuming that because you are indifferent between modern books and classic books everyone should be indifferent. I think that people prefer modern books and I base this assumption on the fact that most people read modern books (I think economists call this revealed preference). Whilst economists tend to simply accept people’s tastes I will take the plunge and examine why the taste exists in the first place:
People read in isolation. However people also read as a collective. People form book clubs because they like to read and talk about the same book. In society, as a whole, people might like to talk about the same book with another person. The chance that two people have recently read the same classic book is quite small and therefore the recent best sellers list is a bit like society’s book club. It signals to people what book they should read not because it is necessarily the best book per se but it is the best book at giving them the chance of having read the same book as another randomly chosen person.
Therefore we should tax old books because the existence of old books makes it less likely that people will read the same books!
Nathan:
Your claim that due to the large number of entrants you would not expect the difference in quality between the best and second best to be very large is not inconsistent with Gruen creating $8.50 in value by writing a slightly better book than Faulkner. If you accept my claim that the opportunity cost of the time involved in reading a novel is $1,000, then Gruen’s book could be less than 1% more valuable than Faulkner’s and create more than $8.50 in value.
The $1000 is irrelevant. Suppose that (after accounting for the $10,000 or $100,000 or $5 value of my time), I’m willing to pay $9 to read Faulkner or $10 to read Gruen. The Faulkner is already written, and available for $8.
Then if I read Faulkner, there’s a $9 social gain, of which I receive $1 in consumer surplus and the Faulkner estate collects the remaining $8.
On the other hand, if Gruen devotes $8.50 worth of effort to writing a book she can sell me for $8.99, then the social gain is the value to me of the book ($10) minus the cost to her of writing it ($8.50), or $1.50. Of this, I receive $1.01 in consumer surplus and she receives $.49 in producer surplus.
(Of course, she won’t write a book just for me, but she might devote $8500 worth of effort into writing a book for 1000 people just like me, in which case the numbers all scale up.)
So quite independent of the cost of my time, Gruen’s entry into the marketplace reduces social gain.
@Steven Landsburg,
Because each individual has preferences between authors given the past information they’ve gathered they associate a certain probability of a book being entertaining with that specific author, and this is specific to that consumer’s preferences. Let’s say that a given consumer assumes the probability of finding a contemporary novelist entertaining at 95%, while they believe the probability of finding a classic novelist entertaining at 50%. In this case a consumer is willing to pay for the 45% greater chance that they will find the contemporary novel entertaining. How is the $8.50 they pay for the contemporary novelist not justified by the risk they’ve avoided by picking a book based on this past information that will lead them to a higher probability of success?
I just think you’ve assumed that consumers will automatically find “Anthony Trollope, Philip Roth and William Faulkner” just as entertaining as Gruen, when I can easily see people having a preference for contemporary novels over classics.
@Landsburg 29,
Using your example above, what if Gruen was worth $20 to you and Faulkner was worth $0.
Jonathan Campbell – Thanks for the explanation.
Perhaps why people see a difference is that in the case of authors the loss is to a small group of people who are also authors. In the case of carbon emissions the cost is to almost everyone.
If the cost of BP’s emissions fell primaries on Shell I doubt that anyone would be calling for a tax.
I’m not sure that this is a principled argument though.
I agree with Professor Landsburg that there is a problem and a tax is a solution. But I understood the situation better when I changed the products.
Suppose there are a several privately owned springs in the economy. They are the only source of water or anything to drink. The water is produced at zero marginal cost. The price is, however, $15 per jug because of lack of competition among the few spring owners. The water is fine and can satisfy thirst day after day indefinitely.
Along come a number of folks who plant orange groves. They also install juicing machines (we ignore consuming oranges other than as juice). Year after year the orange growers can now supply fruit juice to drink, but not at zero marginal cost. The orange growers begin to do so, and the price of juice equilibrates at $8.50 per jug. (To simplify, assume competition in orange juice, so this price is equal to marginal cost.) Meanwhile, the competition from juice drives the price of water down to $8.50 as well.
I agree with Professor Landsburg that there is market failure. Water is underproduced given that its price remains above marginal cost. Furthermore, because water’s price is still too high, there is excessive demand for juice and it is indeed overproduced. That is, if water were priced at zero, the demand for juice would be less. (I do not think it would be zero, however.)
If I am right that my water/juice story is analogous to the old/new novel story, then Professor Landsburg would say that juice is overproduced because there is a negative externality. If I understand him correctly, he would say there is plenty of water and thus the production of juice is wasteful. He would propose a tax on juice.
The negative externality I see is a pecuniary one, the fall in price received by the spring owners. It is not my impression, however, that pecuniary externalities are generally considered a market failure that justifies a corrective tax.
There is nevertheless a market failure leading to the misallocation of resources. It seems to me that a juice tax is an answer to the problem, although not the best one. A tax would discourage resources from being in the juice industry and it would indeed increase the demand for and production of water, even though water is not competitively produced. But the tax would not lead to an expansion of water production to its optimal amount, the point where water price equals its marginal cost of zero. It seems to me that the better solution would be to somehow directly force the water market follow marginal cost pricing.
It seems to me the market failure here is the fact that old books (faulkner) have a positive price. If old books are priced at their marginal cost (zero), we would read old books up to the point where the value of reading another old book is just equal to the cost of time. Thus the value of the marginal old book is the cost of reading time.
In this situation, I will buy and read a new book (gruen) only if its value to me is equal to the price I pay to the author plus the cost of my time. Put differently, the price I will pay the author is equal the value of the book to me minus the cost of my time. Since the price I will pay the author of a new book is equal to its value over the value of the old book. Gruen will write the book only of that price (paid by me and other readers) is enough to cover her marginal cost of writing the book, so new books are produced if they have sufficient novelty value.
The problem, then, is not excess incentives to write new books, it is the mis-pricing of old books. The solution is not a tax on new books, but a shorter time until old books become public domain.
@ David O Cushman,
Aren’t you ignoring the consumer surplus generated by provided by providing a variety of drinks. In what way is juice qualitatively equivalent to water?
There is an error in the original post. Corrections are in bold.
“When we talk about setting policy, Landsburg is implicitly talking about how property rights should be allocated in the first place. When we tax the polluter, Landsburg is declaring that his neighbors have a property right to carbon-free air.”
Suppose every time I buy a Gruen for $8.50, she had to do $8.50 worth of work. Then, the market failure would disappear, no?
In reality the cost of producing a book I buy depends very much on the number of books eventually sold.
What we have, then, is a market where price signals are distorted by economies of scale.
This seems, to me, quite different from the issue of Carbon Dioxide emissions, where price signals are distorted by externalities.
I agree that this is probably a significant reason. Without such a reason, it seems puzzling to me why people would have such a strong preference for “new releases” in books as well as other cultural content. There may perhaps be some marginal benefits in more modern settings and the like, but a typical 2013 Roman Empire novel is still going to sell a lot more today than a 2003 Roman Empire novel, and that seems hard to justify based purely on taste.
Of course, there can still be an inefficiently high number of new novels competing to be the “top fashion”.
1) Perhaps a separate question (Sorites Paradox), but at what point did we cross the threshold where there was enough literature to carry us forward. Where it comes into play here is are you so sure that we’ve crossed that threshold? I mean seriously, how much content is needed to ensure a vibrant culture among 7 billion? I’d say more than you’re allowing for.
2) I would argue this is a much larger issue with technology than with the arts. How much true value is being destroyed by the need to create the slimmest of marginal improvements to technology when we could mark this point in history as the end of tech and start making computers/cars for very little. How is it that a new iPhone is worth $200 more than the last one. I would argue that there’s far more value in churning the arts than in churning technology at this point. At this point I would argue we’re back at Sorites Paradox and my judgment is that you can look at each book at contributing a hair bit of extra value but those hairs somehow add up to a lot. Meanwhile I look at iPhones and not only can I not see even the marginal contribution but I see vast waste.
3) I’m less sure of this argument but it seems the zero marginal cost is arbitrary. We could do the same analysis for most goods as the value above and beyond marginal cost and get back to the same place no? Net the cost of raw input and I see huge waste.
“Would I had phrases that are not known, utterances that are strange, in new language that has not been used, free from repetition, not an utterance that has grown stale, which men of old have spoken.”
Thus wrote Khakheperresenb, an Egyption scribe, around 2000 BC. Since then, we have seen Virgil and Dante, Chaucer and Shakespeare, Flaubert and Camus, Dostoevsky and Faulkner. Given that, I think you will find it impossible to define a threshold by which your externality is decidedly at hand. Unlike CO2 emissions.
As others have noted, the biggest source of market failure is that the price of Faulkner’s book is above its marginal cost. More contemporary fiction should push the price of Faulkner’s book downwards, closer to its marginal cost. Although the new novel creates some deadweight loss, it also decreases some of the deadweight loss from Faulkner’s monopolistic pricing. Thus, it’s far from clear that new novels impose social costs on society, something that’s more difficult to argue for pollution.
How do you justify taxing carbon emissions without also taxing novelists?
1. It is far more politically feasible to get a carbon tax.
2. The evidence is less solid about the how much harm the novel does. Maybe the Gruen novel $8.00 better than the Faulkner novel.
Steven:
I’m willing to pay $9 to read Faulkner or $10 to read Gruen. The Faulkner is already written, and available for $8.
Then if I read Faulkner, there’s a $9 social gain, of which I receive $1 in consumer surplus and the Faulkner estate collects the remaining $8.
On the other hand, if Gruen devotes $8.50 worth of effort to writing a book she can sell me for $8.99, then the social gain is the value to me of the book ($10) minus the cost to her of writing it ($8.50), or $1.50. Of this, I receive $1.01 in consumer surplus and she receives $.49 in producer surplus.
I do not see how these prices could be sustained in a competitive market if consumers shared these preferences. Faulkner’s estate could increase its profits by lowering its price to $8.49 and capturing all of the sales.
Is there any way the market failure you claim to have identified could occur in a competitive market?
If one accepts Matt Ridley’s argument that the net economic effect of increased CO2 levels is positive for the next 75 years or so, should we be providing tax credits for CO2 emissions?
How about this. When you pollute you degrade the evironment making each subsequent bit of pollution less damaging. Your actions diminish this particular problem. When you write a good novel you leave more good choices for the future and you compound the problem. The polluter’s actions asymptotically alleviate a dilemma but the novelist’s asymptotically worsen one.
#46 -Ah, but if you degrade your environment, you reduce the amount of good environment left. Lower supply equals higher price, so each subsequent bit of pollution is more damaging.
@Ken B,
You’re also ignoring the fact that books become irrelevant overtime.
@Ken B,
Your analysis also ignores positive feedback and tipping points.
Nathan:
“I do not see how these prices could be sustained in a competitive market if consumers shared these preferences. Faulkner’s estate could increase its profits by lowering its price to $8.49 and capturing all of the sales.”
1) Very good point. It is reasonable to agree that there exists an externality from authors to claimants of past author’s work, now let’s see whether/why it manifests itself.
2) Your “competitive market” is a misnomer, as by definition, Faulkner’s estate control a monopoly ressource (with a competitive fringe). But it’s worthwhile to consider whether they seem to Max profit.
Faulkner’s estate are presumably constrained to charge the same price to all consumers (by arbitrage). One reason why prices may show up as stated in the example is that Steven is not the marginal buyer.
Thinking about this issue in a fully-rational model is tricky:
1/ can FE deter new authors from writing? (think classic incumbent/entrant reputation games)
2/ Without commitment, they will charge the static monopoly price every period. With enough variability in demand, that looks more Cournot-like… and more realistic !
, we need to look at optimal limit pricing (they want to promise to keep price lo
@taips,
“1) Very good point. It is reasonable to agree that there exists an externality from authors to claimants of past author’s work, now let’s see whether/why it manifests itself.”
No, there’s no externality in what Nathan describes, this is how a regular market functions. Faulkner lowering his price increases consumer surplus, and since this occurs within the market, there’s no externality. For there to be an externality to the new novel, they’d need to be unable to lower their prices.
I beg to differ. I wasn’t talking about Faulkner estate’s reduction in price causing a shift in demand away from NewNovelist X (that’s just market forces, indeed).
Here, social welfare decreases when the supply of new books increases while the private welfare of newbook sellers and readers increase. Whether we want to call this an externality is indeed disputable.
My point was just to say “let’s not argue on the basic mechanism, let’s work through indirect implications”)
Do we know that social welfare decreases or is that just speculation from Landsburgs very specific example?
#54. If the only value from novels is reading pleasure, then I think social welfare is reduced. Novels may well add other value to society, and new novels may add more of this.
As an illustration, when I went into a bookshop 2 years ago, maybe I selected a few books, and left thousands un-bought. Often my choice was marginal, I may have chosen a different selection on a different day. If I go into that bookshop today, very few of those thousands of un-bought books will be available. I will be presented with a completely different choice of thousands of books. (Actually, there is a fair chance that the bookshop won’t be available either, but that is a different point). It seems unlikely that the value I would have got from those nearly-as-good books has reduced by very much in those two years.
On a related note, have you ever “discovered” an old-ish author, and find that they have lots of books already written for you to read? There they all are, waiting for you, with a good chance of you really enjoying them. Suddenly the choice of your next novel is easy!
I think there is a lot of this in the book market. It is impossible to actually make a sensible choice becasue of the vast array of books available. Anything that makes that choice a bit easier is worth something. This is why an established author that writes a book a year is so valuable.
@Harold,
Of course I find enjoyment in older authors. Three of my favorites are Robert Heinlein, Douglas Adams, and Isaac Asimov. However, it’s also clear to me that new authors have created a lot of value in the world.
If novel writing was reducing social welfare, what is the mechanism that continues to support new writers when the vast majority of them will fail? I can only assume that to most writers, writing novels is not a cost to them but a benefit regardless of their monetary gain. They prefer writing to other leisure activities. When they do become established, writing may become a burden and feel like a cost, but by then their established fan base is receiving a much higher value than Landsburg is using in his examples so far. Regardless of how you feel about JK as a writer, do you think her fans would have found an equal replacement in already established writers? Landsburg’s idea to tax new authors makes it more likely that these established authors will not exist, since the transition period from writing mostly for pleasure to becoming an established author is more costly.
I also think there are other explanations for why new authors can create social value over old authors. One way is through network externalities:
http://en.wikibooks.org/wiki/Strategy_for_Information_Markets/Network_Externalities
Can we somehow tell the same story for CO2? What positive externalities can we think of for using CO2 creating energies over alternatives. I can’t really think of any.
@Harold,
Also, why are you still going to bookstores? Nostalgia is the only reason I still sometimes find myself at Barnes N Noble.
I posted this on the more recent version/update/whatever of this post, so I’ll just briefly summarize my point:
Given an average yearly wage of $50,000 per person, which is the expected value of an author doing something other than authoring (some would make millions doing other things, some would live in poverty, the average should be $50k), if the already printed Falkner is valued at $9 and sold at $8 and the soon to be released Gruen is valued at $10 and sold for $8.50, then Gruen needs to sell at least 50,000 copies to match the social value of the Falkner.
At this point the cost to produce each copy for Gruen will be $1, which gives a $7.50 gain to Gruen and a $1.50 gain to Landsburg, for a total of $9 social value, the same as Falkner.
The more copies Gruen sells, the greater the social value – up to $10 per book.
So Landsburg’s point holds until the difference in perceived value and the cost to produce are equal. When the cost to produce drops below the difference in perceived value, the new work has more social value than the old.
Thus we encourage new bestselling books, because even for Landsburg they have a moderate but tangible net positive social value.
My gut intuition is that this is exactly as true for air pollution as well, though finding the magic equilibrium might be more difficult than the simple math for the bestsellers.
Daniel – note I start my comment with “if the only value form novels is reading pleasure” I think they do more than this. The Harry Potter phenomenon is a very good illustration. When they first came out, they got a generation of children reading more than they had before (at least let us for now assume this to be the case). Each of those readers got huge enjoyment from the books. These books still exist, yet they are not read to the same extent as they were. Surely, all those kids reading Hunger Games would have enjoyed Potter just as much?
Part of the value added is a social glue – a shared experience that can help communication. One thing that can signal that this is the book you should be reading is its newness. As I said before, there are so many books choosing between them has to be somewhat arbitrary.
@ Harold,
My argument is that there is value added by newness that can not be replicated by other means easily. Would the Harry Potter phenomenon have happened if it was from 1930?
@ Harold,
My point is that there’s definitely distinction between pollution in that the only externality I can identify is a negative one, and new writers in which we may be able to identify both negative and positive externalities.
Daniel – we agree on this, but I have not been clear. I believe there is positive externality from books due to their newness, but this is separate from the pleasure one gets from reading them. I believe that someone discovering Harry Potter now will get as much pleasure from the books themselves as the first readers of the Philospher’s Stone did in 1997. The current reader will miss out on some added pleasure from sharing thier experience with lots of others, but that is due to popularity not newness per se.
However, novels do not only entertain. They allow us to empathise with others. We can perhaps get to understand how and why people react in a certain way, and we can feel a little of how it would be to be in difficult situations. They provide role models for us, and give us models of causes and consequences (not always accurate). Books from an earlier period may well fail to do these as well as contemporary books. Harry Potter, if written in the 1930’s, would have very different models of behaviour.
So new books do have some positive externalities, but we have to be careful not to mix these up with the fact that we get pleasure from them.
@ Harold,
Okay, that seems fair. I’ve probably not been very clear myself, so it makes sense that we were talking past each other a couple of times there.
Short version: Won’t the quality of books decline along with the quantity, given diminished competition under the tax?
Long version: You, Mr. Landsburg, clearly belong to the “subsidize and tax” branch of the neoclassical school. There are longer-term consequences of your favored measures that you are neglecting. Here is an example.
A good is “public” if it features non-excludability and non-rivalrous consumption.
Consider a semi-public good which is excludable but whose consumption is still to an extent non-rivalrous, such as a movie in a movie theater.
Suppose the room is mostly empty with only a few patrons watching. Wouldn’t it be a great thing for the movie theater owner to go round up some hobos and deadbeats and let them watch the movie for free, too?
It would not cost him or his paying customers anything, but more human happiness would be created as if out of nothing. “Market failure,” you declare and suggest that the government subsidize the movie theater owner or tax empty seats.
I agree that this might extract better outcomes from existing theaters. However, it would also present distorted incentives to people who are thinking of building new theaters. The basic rule “if you subsidize / tax something, you get more / less of it” is fully operational in this case.
Suppose the government simply pays the owner the full price of the ticket. The owner will then be very smart to build not a 500-seat theater (which would be his choice in the absence of interventions) but a 50,000-seat theater and open it to everyone for free or even pay people a certain amount to come in to squeeze the most out of the subsidy.
If the government instead taxes empty seats, then the owner is subject to an incentive to fill the seats to avoid the tax. Since any price other than the present one will yield less revenue, if he lowers the price to attract a full audience, his income is reduced. Alternatively, the owner might set a regular price for a movie, but 2 minutes before it starts, he would start inviting people in for free. It is expected that there would be a line of people waiting for the freebie. But now some people on the margin who before the intervention paid for their tickets instead get in the line. The income to the owner is reduced again. As a result, new builders would build fewer seats, not 500 but maybe 200.
Subsidizing and taxing are not market-neutral.
The reason why laissez-faire capitalism wins here is that in a growing or progressing economy, old businesses steadily disappear, and new businesses steadily increase. So, the benefits of particular subsidies and taxes grow smaller over time (as regulated companies go out of business), and their costs (in terms of resources misallocated due to the perverse incentives) grow bigger. Eventually, society suffers losses.
Now in regard to this case, the assumption is that the marginal costs of copying a marginal eBook are zero, just as the cost to the theater owner of inviting a marginal person. If Faulkner’s and Gruen’s books are of similar quality, then let’s suppose that F and G each gets 500K readers. If F were instead employed as an exterminator (is that a reference to your “Property Is Theft” article in Slate?), then G would get 1M readers, whose happiness as consumers would be barely affected, with no increase in costs to her (and therefore, in “social” costs), but F would produce something extra on his new job. You again smell a market failure. You in your capacity not as a fiery entrepreneur but as a cold scientist with zero understanding of the fiction industry have nevertheless noticed an obvious improvement to the situation, improvement that the market — that presumably should have known better — has not made.
Very well, let’s now tax authors, confiscating, e.g., half of their after-all-other-taxes income. For any entrepreneur there will be two possibilities. One, a marginal author H will exit the industry. Since the demand is untouched, H’s readers will be picked up by other authors, such as F and G, for whom this effect will offset their own taxes. Two, H will not give up writing 100% but divide his labor between writing and exterminating. As a result of his relative negligence, he will write a _worse book_. It will get bad reviews, and people will again gratitate toward F and G. So far, so good: H will be doing something more useful than paper-pushing.
But what of K, this time a young and rather promising writer, contemplating entering the industry? F and G are now resting on their laurels. Normally, K would face competition from our H; however H has been made either non-existent or mediocre by your taxes. It’s now easier to lure his readers away. Due to this lowered competitive pressure, K _will write a worse novel himself_. His own human resources will be misallocated, as in, not devoted to the conduct that brings the most happiness to the consumers, just as the new movie theater entrepreneur, when made aware of the tax, will fail to employ resources in the best interests of the public.
You write that “there are far too many superb novels to read in a single lifetime.” Unfortunately, not only will the quantity of novels be affected by the tax (the desired outcome) but also the quality. Under your own tax regime, the quality of _all_ novels will decline _across the board_. If implemented, your attempt to correct the market failure will undermine the very assumption used to justify your intervention.
There might still be a reason to write high-quality novels in order to capture the consumers, such as perhaps you, Mr. Landsburg, yourself with very good tastes who would refuse to read bad novels outright. But that surely is a small market. Most people will simply choose among available alternatives; what is good and bad is relative for them and judged only by comparing and contrasting.
Again, you point out that the competition in the fiction industry is sufficient to generate _great_ novels; you further argue that it is excessive for the optimal _quantity_ of novels. But conspicuously missing is any assertion that books are _too good_, that the competition is too fierce and therefore unnecessary for _quality_, as well, such that the quality, too, would become optimal when the competition is dampened with the tax.
In the longest run, the formation of what is called the “spirit of an age” as expressed in works of art will be inhibited. It will make the world created by our children less beautiful than is optimal.
The issue is not whether laissez-faire capitalism is perfect (that is, whether all obvious opportunities for improvement are always taken), but whether there is a better alternative to it, _all things considered_. This, then, is the “principled” reason not to tax novelists, if we take our utilitarianism seriously.
Also, I see that you have disavowed any belief you may have entertained in “Fair Play” that there is such a thing as natural rights.
It may be a tad harder task to figure out who has the natural right to air — the polluter or the neighbors, but it is clear as day that “the Faulkner estate” does not have a natural “property right to the attention of potential readers.”
I mean, are you kidding?
Dmitry A. Chernikov:
Short version: Won’t the quality of books decline along with the quantity, given diminished competition under the tax?
Yes, this is the whole point of the tax. In equilibrium the quality of books is too high (i.e. authors devote $X worth of resources to add less than $X worth of quality). We want to discourage that.
If you want to bring about the situation in which new novels are both fewer in quantity and worse in quality, then I agree that the tax will accomplish that.
If the tax is introduced “now” at t0, then competition is still intense, so a person who expects to write a “decent” book may be deterred under the tax, and H’s only chance is to write a “spectacular” book that will compete with F and G. It’ll be a winner-take-all marketplace. Quality of new books will not decline initially, but quantity will decline dramatically.
Daniel makes what I think is the crucial point: “books become irrelevant over time.” Old novels slowly lose their relevance and in this sense “go out of business”; new novels produced are subject to the incentives of the tax. Competition at some later t1 will become less intense, and _both_ quality and quantity will begin to suffer, precisely as per your design.
If you deny that, then why not go all the way? If the number of existing great novels is sufficient for any person’s lifetime, then why not outlaw writing new novels altogether, while at the same time putting all old novels in public domain, so that people could copy them for free 100%?
So then, when, decades later, someone wonders why there are so few great new novels, and why most of them are in fact trash and do not live up to the quality of their predecessors, it’s unlikely that he will think of blaming the obscure “Landsburg tax.”
I think the new generation deserves the right to make its own culture and to try to make it beautiful.
You may object to my conclusion that “the new generation deserves the right to make its own culture” by saying that it does not need so much culture as expressed in novels; why doesn’t the new generation deserve the right to more vermin-free houses?
If it were not the case that old novels gradually lost their “greatness” — not in any objective sense but in the subjective estimation of the consumers — then the saturation point would long ago be reached, such that no new novel, no matter how great, would be worth writing. But folks do keep writing; modus tollens.
I think people mention above that one difference between novels and pollution is that for novels, there is such a saturation point, i.e., equilibrium, at which no new novels will be forthcoming and no new authors’ labor will be misallocated, so the problem is naturally “contained”; whereas pollution is not only unlimited, but the worse it gets, the more damage an extra unit of pollution does.
The system continuously tries to leave the equilibrium via obsolescence of old great novels but is brought back to equilibrium via new great novels.
You think that the quantity supplied and quality of the novels in equilibrium is too high, and the tax will lower it closer to optimum. I think I am in agreement, but let me question one assumption.
Correct me if I am wrong, but consumers seem to disagree with you that all great books are interchangeable, because in such a case, perfect competition would cause the prices of digital versions of those books to plummet to their marginal cost of zero. It seems that each author has his own following and therefore commands some monopoly power.
But in that case, F’s being steered into exterminating would decrease consumer happiness by more than a “hair.”
1. Let me come back to your point that the diminution of quality is part of the plan. In the OP, you say that there are “far too many superb novels to read in a single lifetime.”
To me, that means that a better state of affairs would be so many _superb_ novels that a fiction lover can reasonably consume in his lifetime but no more.
It does not mean that you intend to turn _all_ superb novels into merely “good” novels, which both of us have agreed is exactly what’ll happen under the “hefty” tax.
(The tax will chop off both ends of the bell curve of quality and push down the curve itself. Bad novels will disappear because the reward will be made vanishingly small; superb novels will disappear due to lessened competitive pressures; good novels will decrease in quantity.)
Quality does not contribute to the market failure. We want fewer novels competing, given the assumptions that (a) their authors just steal each other’s customers, (b) all _great_ books are all alike, so even, say, 10% of the number of novels produced would satisfy our fiction lover, and (c) the marginal cost of copying an eBook is zero.
(Here, (c) allows you to avoid talking quite like a central planner who imagines there are “too many” novels out there.)
If quality worsens, then (b) will be a vacuous premise, because there will be no great books at all. So, it seems that the worsening of quality is still an unhappy side effect of the tax.
2. To add to the critique of (b), consider two comparisons. First, in a restaurant, there is a “great” soup and great dessert. Many people would like both, so they may indeed have trouble choosing between them.
Second, very spicy food vs. mild food. A lot of people love spicy food and don’t care for mild food; again, many others detest spicy foods and prefer the more mild stuff. A “great” spicy dish is a very different good from a great mild dish. A lot of people would have no trouble picking one or the other. This, I want to suggest, is how it is with books.
For example, F’s becoming an exterminator would deprive me of the pleasure of being _his_ fan with all the rights and duties of such fandom. I might very well not care enough for G to become his fan. It looks like more than a “hair” worth of difference.
Dmitry: Among all your many words, I can’t seem to find an actual argument. Perhaps you can clarify the following:
1) Do you believe that in a market where novels can be reproduced at essentially zero marginal cost, novelists will exert efficient levels of effort?
2) If so, why?
Ok, let’s summarize. Your argument is based on 3 premises:
(a) all writers tap into the same demand for great books;
(b) writing great books is like textbook wheat farming which, you know better than I do, is a staple illustration of perfect competition; so, all great books are indistinguishable from each other;
(c) despite this perfect competition and the marginal costs of zero, somehow, prices of novels are way above zero.
Conclusion:
Market failure.
I ask:
1) Is there a contradiction between (b) and (c)?
2) Is (b) really plausible?
3) Given that the quality of old novels will decline due to natural obsolescence, and the quality of new novels will decline due to diminished competition, will not (b) become a vacuous and therefore false premise for lack of “great” books under the tax?
That’s all.
I am actually being nice to the argument and ignoring (a) which I shouldn’t. So, allow me to add
4) The degradation of the quality of novels after the tax is imposed will cause the demand for novels to decrease. This’ll squeeze the remaining authors and cause the market failure — on Steven’s own terms — to recur. There will once again be “too many” authors competing for the attention of the now less interested readers even after some have left the industry under the influence of the tax. As a result, the tax might not solve the problem.
Dmitry Chernikov:
b) writing great books is like textbook wheat farming which, you know better than I do, is a staple illustration of perfect competition; so, all great books are indistinguishable from each other;
If this were true, it would undermine my argument. But it’s obviously false, so I don’t see why you bring it up.
Be that as it may, it would help a lot if you could tell us whether you believe the market for novels is efficient, and if so why.
I see that you are not grasping my refutation.
On the contrary, if (b) were true, and writing were in fact an example of perfect competition, then your argument would be _correct_, i.e., _sound_, as in, your conclusion of market failure would follow from true premises.
But (b) is false and yes, obviously so; so, your argument which _depends_ on (b)’s being true is not sound. It follows that your argument in the original post does not demonstrate that there is a market failure in the novels market.
That does not necessarily mean that “the market for novels is efficient”; it’s not my job to show this to you (are you kidding?); merely that _you_ have failed to prove that it is _inefficient_.
Your argument is therefore merely a model that uses unrealistic and incorrect assumptions “cleverly” to arrive to a false conclusion.
The last sentence should read: “… to arrive to a _dubious_ conclusion.” I don’t know if there are any failures in the market for novels, but my point is that as of right now, _neither do you_. The only question that matters on this thread is the correctness (validity and soundness) of _your_ argument in the OP. It turns out that this argument is worthless, and the model you have outlined may look pretty from your ivory tower but empirically does not stand up to scrutiny.
I hardly believe I am being misunderstood.
Let’s call X and Y “functional substitutes” if: if one buys X, then he will not buy Y, and vice versa. For some people, an F’s novel may be a functional substitute of a G’s novel. But not for all; not for voracious novel readers, for example. It’s up to each consumer to decide how many and which authors’ novels to read.
Let’s further call X and Y “utility substitutes” if one is “indifferent” between X and Y. Clearly, since (b) is, as you have agreed, obviously false, being a fan of F’s novels yields a very different amount of utility to most people than being a fan of G’s novels.
Hence, again given the falsity of (b), F’s and G’s novels are not utility substitutes.
F’s novel then is a unique product that differs from G’s novel as much as a toothbrush or a fishing rod also differs from G’s novel, both in terms of function and utility.
This gives the lie to your premise that “Because I’m a fan of Sara Gruen, I might well read her next book — and I might even enjoy that book a hair better than whatever book I’d have read instead.” You will likely enjoy Gruen’s book _much_ (and not a hair) better than another author’s book. If that’s not true for you, it’s true for such a substantial number of consumers that both novels can be sold at a monopoly price. Therefore, _much_ would be lost if Gruen had gone into exterminating.
Dmitry:
You will likely enjoy Gruen’s book _much_ (and not a hair) better than another author’s book. If that’s not true for you, it’s true for such a substantial number of consumers that both novels can be sold at a monopoly price. Therefore, _much_ would be lost if Gruen had gone into exterminating.
Once again, there is absolutely no argument here. Some reader (or readers) enjoys this book much more than some other book. So what? What leads you to believe that the social value of this enjoyment exceeds the social cost of producing the book (i.e. the output we forgo because of the author’s writing novels instead of exterminating)?
To say that there’s some value to new novels is to completely ignore the key question. There is also some value to every single product that’s produced, even when that product causes massive negative externalities. We still have to face the question of whether the value of the product is sufficient to justify its cost.
Once more: Pointing out that new novels have some value is irrelevant to this discussion. We all understand that they have some value. We even understand that in some circumstances, they can have great value. But there are excellent reasons to believe that, at the margin, novelists devote more effort to their work than is justified by that value. If you have an argument to the contrary, please provide it. But please don’t continue to waste everyone’s time with long screeds that ignore the question entirely.
Dmitry:
Unless you actually bother to say something substantive, this will be my last reply to you:
Your argument is therefore merely a model that uses unrealistic and incorrect assumptions “cleverly” to arrive to a false conclusion.
The assumptions are that books can be reproduced at extremely low marginal cost and that a person who is reading one novel cannot be simultaneously reading another. Which of those assumptions do you find unrealistic?
Steven, can you comment on my understanding below?
Normally, if I produce an innovative good, I can set for it a monopoly price that will depend on consumer demand. However, this monopoly is temporary. Other entrepreneurs, seeing my success, will want a piece of the action, imitate me, and the equilibrating race to bottom will decrease prices until they reach marginal costs. Even one or two imitators are sufficient for this process to commence.
The market failure in the novels market is due to _permanent_ monopoly prices of novels that do not, via equilibrating market process, tend to fall to marginal costs. This is so due to copyright and because it’s implausible to believe that great novels can be imitated, such almost immediately upon the release of a novel, a dozen writers will create similar novels that escape copyright restrictions and drive the price down to cost this way.
One possibility is to abolish copyright. But this cures the disease by killing the patient: it equalizes the prices and marginal costs but (presumably, given the existing business model) destroys the incentives to write. Under no-copyright there would be no new novels at all. So, this is an overkill.
The market for novels is _too profitable_. Many more people than optimal are attracted by these permanent profits.
The tax acquiesces in the disease and treats its symptom: too intense a competition. Monopoly prices are allowed as the lesser of the two evils, yet the herd of novel writers is thinned out.