I assume the answer is yes, but I can't see any obvious reason why. I'm talking about, for instance, the government offering people $10,000 to start a neighborhood coffee shop. (Neglect for now the fact that such money was taken from taxpayers in the first place.)
My first thought was that such a subsidy would make it too easy for any old inexperienced person to start a business, thereby wasting society's resources when that business ends up failing. But then this seems to conflict with how we argue that barriers to entry in other sectors are harmful.
So a second question might be, are barriers to entry always harmful? It seems one possible benefit to a (not-too-high) barrier to entry is that it would discourage incompetent entrepreneurs from wasting society's resources.
Finally, why doesn't the venture capital process enable any entrepreneur with an excellent reputation to gather billions in venture capital and enter an industry like pharmaceuticals and compete with the oligopoly? If the millions of dollars required to obtain FDA approval of a single drug keep out competitors, and prices are high because of that, couldn't a highly competent entrepreneur go to wealthy venture capital providers and propose a new company that would be able to then undercut all the current companies? What's the error I'm not seeing?
Think outside the monopoly paradigm. Net-based microsecession | Why anarchy hasn't worked
"I assume the answer is yes, but I can't see any obvious reason why. I'm talking about, for instance, the government offering people $10,000 to start a neighborhood coffee shop. (Neglect for now the fact that such money was taken from taxpayers in the first place.)"
It's not exactly a fair discussion if you've eliminated one of the main issues. Assets appropriated from productive members of a society weakens their ability to continue production. Your answer, save for your unnatural condition, could be answered most simply by that route. However, I like a challenge, so here we go!
"My first thought was that such a subsidy would make it too easy for any old inexperienced person to start a business, thereby wasting society's resources when that business ends up failing. But then this seems to conflict with how we argue that barriers to entry in other sectors are harmful."
There's also the consideration that your putative grant receiving entrepreneur has no skin in the game, and when it necessarily gets tough, they will be much more likely to just drop it altogether and go back to earning a wage again, or even worse, try for another grant.
"So a second question might be, are barriers to entry always harmful? It seems one possible benefit to a (not-too-high) barrier to entry is that it would discourage incompetent entrepreneurs from wasting society's resources."
You must qualify the statement here. Unnatural barriers to entry are always harmful. Your grants would be, in effect, unnatural barriers to non-subsidized entrepreneurs, as they would necessarily have to go without resources that the subsidized has appropriated, and in some cases, compete against them directly. Even worse, as a result of your program, some of that legitimate entrepreneur's profits are appropriated and given to his subsidized competitor! Oops, I forgot your earlier condition. Oh, well...
"Finally, why doesn't the venture capital process enable any entrepreneur with an excellent reputation to gather billions in venture capital and enter an industry like pharmaceuticals and compete with the oligopoly? If the millions of dollars required to obtain FDA approval of a single drug keep out competitors, and prices are high because of that, couldn't a highly competent entrepreneur go to wealthy venture capital providers and propose a new company that would be able to then undercut all the current companies? What's the error I'm not seeing?"
How does your new player get around the costs of FDA approval? The rules that apply to his oligarchical competitors will apply all the more to him, a little fish trying to muscle his way to the surface.
Also, how rare must be the venture capitalist be who has both the pockets deep enough to support the initial R&D, and the optimism (or foolishness, depending on who you ask) to think that the first drug developed and submitted will 1) pass FDA muster, 2) make a profit, and 3) avoid any future class action lawsuits?
EddieWillers:"(Neglect for now the fact that such money was taken from taxpayers in the first place.)" It's not exactly a fair discussion if you've eliminated one of the main issues.
It's not exactly a fair discussion if you've eliminated one of the main issues.
I know, but I'm trying to distill out a core principle: is it ever possible for regulation to be good? For example, if the state passed a law restricting itself, perhaps inadvertently.
EddieWillers: Unnatural barriers to entry are always harmful. Your grants would be, in effect, unnatural barriers to non-subsidized entrepreneurs, as they would necessarily have to go without resources that the subsidized has appropriated, and in some cases, compete against them directly.
This. That's what I was missing. Thanks!
EddieWillers:How does your new player get around the costs of FDA approval? The rules that apply to his oligarchical competitors will apply all the more to him, a little fish trying to muscle his way to the surface. Also, how rare must be the venture capitalist be who has both the pockets deep enough to support the initial R&D, and the optimism (or foolishness, depending on who you ask) to think that the first drug developed and submitted will 1) pass FDA muster, 2) make a profit, and 3) avoid any future class action lawsuits?
I was thinking, to the extent to which there is high barrier to entry, the exisitng firms should make high profit margins. And to the extent to which they are making high profit margins, shouldn't there be high profit opportunity to attract enough capital to overcome those barriers? But applying the logic above, I suppose there is only a limited suply of venture capital, so it is a waste to spent it on jumping over massive entry barriers. Still, that leave the question of how drug companies make a profit, since they have to pay the same approval fees (don't they?). Unless the FDA approval guidelines are already biased in terms of the existing oligopoly, which I'm sure is the case.
"Still, that leave the question of how drug companies make a profit, since they have to pay the same approval fees (don't they?). Unless the FDA approval guidelines are already biased in terms of the existing oligopoly, which I'm sure is the case."
Yeah, I tried to express that in the "little fish" analogy, but I didn't flesh that out as much as I should have. I really think that larger existing corporations are very good at lobbying for unnatural barriers to the establishment of new competition. Some examples; big automakers' support of CAFE, big retailers and toy manufacturers' support of CPSIA, etc.
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