A new business opened and imposes additional costs to his competitor
(ex: congestion) also loss revenue to the competitor. Why does an
economist argue that the new business is not held responsbile for the
loss revenue for the additional cost such as congestion.

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Request for Question Clarification by jasonm1-ga on 05 Aug 2002 21:39 PDT

Are you looking for a philosophical answer? As in, do you want to know
why economists believe in competition?

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Clarification of Question by ako-ga on 05 Aug 2002 21:45 PDT

Economists believe in competition.

Hi ako,

Essentially your question boils down to "why is competition good?" The
reason competing companies are not held accountable for loss of
revenue to their competition is because competition is good for the
economy. If someone (say, the government) were to impose penalties on
companies entering a market, then the barrier to entry of that market
would be higher, thus discouraging competition. Note that there are
some markets where the government increases the barrier to entry. But
these costs go to the government, not competing companies.

There are many reasons for the positive nature of competition ("free
market"). This page (http://www.lucidcafe.com/library/96jun/smith.html)
has a brief introduction to the ideas of Adam Smith, considered the
founder of modern economics. Smith argued that competition is
essential to a healthy economy -- that every individual should work to
maximize his own happiness ("utility"), and thus the utility of the
society will ultimately increase.

A good example of free-market economics is the idea of Comparative
Advantage, first proposed by David Ricardo in the early 19thC and
touched on by Adam Smith in the 18th. If you have two entities (say
countries or corporations, for example), and one can do a better job
of producing one product, and one a better job of the other, then they
should specialize.

http://www.systemics.com/docs/ricardo/david.html shows a simple
example.

Unfortunately, it is not obvious where comparative advantage lies. Is
company A or company B better at producing microchips, or soda, or
couches? To find out, companies compete. Company A sells their product
and Company B sells theirs. Whichever company has the better product
or can produce/sell more of it for less will capture the market.

In a perfectly matched market, where two companies sell identical
products for identical marginal costs, they will split the market
evenly. As competition increases, profits for all companies drop to
zero (ie Product Cost = Marginal Cost). Some companies, however, will
have a lower marginal cost for a product (they can produce more of it
for less). These companies have an advantage over others. But how can
we know that in advance? We cannot, which is why competition is
important.

Here is a nice reference on some introductory economics ideas:
http://www.bized.ac.uk/stafsup/options/notes/econ2_c.htm

Hope this helps.

Great answer!