40 TWENTY-FIRST REPORT. 



opened and that mills are built and machinery of a suitable kind installed. 

 Presently the war is over ; the demand for copper falls off to such an extent 

 that the seven new^ mines and the mills used in conjunction with them can not 

 get the copper out and refine it at the low price. These mines are closed ; and 

 the capital in the shape of machinery, stamping mills and the like is lost. 



On the surface it appears that the two cases are identical. In both 

 instances potential competition became actual because of a rise in price. 

 Moreover, there came a time when the price of the commodity is decreased 

 with the result that the potential competitor is driven from the field with a 

 loss or at least a waste of capital. 



Nevertheless, there is an important and fundamental difference in the two 

 cases. In the case of copper the price advanced from 13 to 3.5 cents a pound 

 because of the inability of the producer to supply the total demand at the old 

 price, 13 cents. Had he been able to supply the total demand at the old 

 price, the price would not have gone up. But he was unable to do so. The 

 extra-marginal producer or producers came on the market because of this 

 fact. The function of potential competition in this case is to keep the price 

 from going higher than 35 cents. That is to say that the added supply of 

 copper brought on the market by these men keeps the price of copper within 

 due bounds. In the way the extra-marginal producers have the same effect 

 upon the price of copper as the inferior grades of laiid have ujwn rent. If 

 they did not come upon the market the price of copper would have gone even 

 higher than 35 cents a pound. 



No such function is performed by potential competition in the other 

 instance. Here the price of borax went up, but not because of the inability of 

 the producer to put the commodity out at a lower price because according to 

 the assumptions of Jenks and the others any amount of borax can be put out 

 at the old price of 8 cents. The competitor came in then, not because of the 

 inability of the producer to satisfy the total demand at his cost price but 

 because of the law of monopoly price. The new price is not the right price 

 because it does not correctly guide us in the best use of our productive capaci- 

 ties ; the new price in the caf-e of copper is the right price because it does 

 guide us correctly in the use of our productive resources. The vital difference 

 between them is to be found in the fact that in the case of copper the new price 

 is due to the inability of the producers to get out the total supply at any price 

 less than 35 cents a pound ; in the case of borax it is due to a different prin- 

 ciple of price determination. 



If the foregoing analysis is sound, we can conclude that the wastes that 

 accrue when potential competition invades a field where monopoly is the most 

 efficient unit for the production and sale of commodities are less justifiable 

 than those that occur in businesses essentially competitive in their nature. We 

 have already recognized fho importance of this point as applied to public utili- 



