Market Mechanics 71 



Social Marginal Productivity Criterion 

 and Benefit-Cost Analysis 



What are the implications of collective wants, indivisibility in 

 production, and direct interdependence in resource use for the 

 provision of water derivatives? 



In the market economy, economic efficiency would require that 

 every enterprise employ factors to the point at which marginal 

 costs (cost of marginal inputs) would equal the product price 

 (market valuation of the marginal unit of output). Economic 

 efficiency would be achieved in this manner, however, only if: (a) 

 every product for which factor costs had been incurred were mar- 

 ketable; (b) the market price of the enterprise's products were 

 independent of its rate of output; (c) the market price of the 

 factors employed were independent of the rate of output. These 

 conditions could obtain in a free market if there were no product 

 indivisibility (collective goods), input indivisibility (internal econ- 

 omies of scale), or physical interdependence among the production 

 functions of fiscally independent enterprises (technological external 

 economies). 



If these departures from the assumptions of the competitive 

 model existed, there would be differences between the sum of 

 financial returns from the sale of marketable output and the total 

 economic gains attributable to a socially efficient allocation of 

 resources. There would be a divergence between the private and 

 social valuation of the marginal products of the factors employed. 

 And — since private returns are the indicators which guide resource 

 allocations in a pure market economy — the divergence between 

 actual results and efficient results would permit a reshuffling of 

 resources such that the gainers could compensate the losers and 

 still have something left over. 



Thus there is an opportunity to improve economic efficiency by 

 collective action through extra-market devices. Public bodies, 

 through their authority to tax and levy assessments, have access 

 to financial resources which is independent of the marketability 

 of the commodities or services such resources can provide. 

 When the public budgeting process supplements the alloca- 

 tive function of factor markets, however, criteria are needed to aid 

 in achieving the efficiency objectives for which such public revenues 

 have been used. A great deal of attention has been directed in 



