ap-micro-review-theory-of-the-firm-35-638Who would think that answering the oft-asked question, “What do you think of Pope Francis?” I would have to define economic terms? But honestly, I think he started it! Here you go…

According to David Bosnich writing for acton.org, “One of the key principles of Catholic social thought is known as the principle of subsidiarity. This tenet holds that nothing should be done by a larger and more complex organization which can be done as well by a smaller and simpler organization. In other words, any activity which can be performed by a more decentralized entity should be. This principle is a bulwark of limited government and personal freedom. It conflicts with the passion for centralization and bureaucracy characteristic of the Welfare State.” (This reminds me of the gospel in which Jesus tells people to handle things one-on-one or within the community if possible.)

Regulatory Barriers to Entry
Complying with government regulations costs money–sometimes big money like building a data center to store all Americans’ metadata, and sometimes small money like getting a hairdresser’s license–but it always costs money. This investment in non-productive capital increases the funding required to enter a business and that changes the calculus as to whether to risk starting a new venture or not. Some new ventures are deterred and in this way competition is reduced. Generally, obstacles to new entrants are called barriers to entry; in the case of government regulatory compliance deterring competition, they are called “regulatory barriers to entry.”

Zero Economic Profit
With perfect competition, any profit that rewards capital or labor with profits higher than their marginal cost will experience entry until all capital and labor earns risk-adjusted-returns that are consistent with their market values. This is why in a free society there is less concentration of wealth not more. As government regulates industry, it erects barriers to competition that allow incumbent firms to maintain greater than zero economic profit. (See above, regulatory barriers to entry.)

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