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L.S.E. Essays on Cost; Edited by: Buchanan, James M. and George F. Thirlby
1 paragraph found.
Wiseman, The theory of public utility price
10.28

Since net revenue is the return to the essential economic function of risk-bearing, but cannot be treated as an outlay on a factor, it follows that, if factors of production are to be ideally distributed between uses, the total revenues obtained by firms ( ex post) should be greater than their total outlays and not equal to such outlays as in the conditions of the perfectly competitive model. Also the 'normal profit' principle cannot be satisfactorily replaced, as a condition of the welfare 'ideal' by a requirement that the net revenues obtained by different firms should be equated ex post. The competitive process does provide a check on the undue divergence of the net revenues actually obtained from different kinds of productive activity, by directing activity towards avenues in which large net revenues seem likely. But even with complete freedom for potential producers to enter any market they wish there is no reason to expect that competition will, or (from the point of view of an 'ideal' factor distribution) should, result in a general equality of achieved net revenues. Net revenue depends upon the individual skill of risk-bearers and decision-takers and upon their attitude to risk. If the abilities and risk attitudes of these individuals differ, then net revenues must also be expected to differ. A welfare principle of net-revenue equalization, in accord with the general principle of factor-price equalization, would thus be valid only in a society in which risk-bearers and decision-takers were of precisely equal ability and took the same attitude to risk. Such a situation being unlikely, it seems better to substitute the more realistic, if less precise, formula that some net revenue must be obtained if the employment of factors of production in any use is to be justified, and that some means (such as the competitive process) is necessary to limit the extent of the divergences between the net revenue obtained from different kinds of productive activity.