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Zero marginal – not average

I listened to an interview with Jeremy Rifkin on the subject of zero marginal costs in which he steered dangerously close to saying that average costs were tending to zero. That latter is simply not true and quite misleading. The problem that newspapers have faced is that they have very high fixed costs but the actual cost of delivering a newspaper, especially in digital form, is essentially zero. People appear to be willing to pay for the marginal cost only. In other words, they treat news as a free good. The average cost of delivering good news is high; the marginal cost is negligible. They are not the same.

Another example that I often use in class is the pharmaceutical industry. The R&D necessary to bring a pill to market is very high. The cost of the factory to produce pills is very high. But those are all fixed costs. The cost of actually producing the pill is almost nothing — a bit of powder and a drop of medicine. So people want to pay just for the cost of the pill itself — not for the R&D and the factory. Cheap knock-offs appear on the market that just cover the marginal cost — the variable cost — the powder and the drop. The dilemma then is who will bear the cost of the R&D?

So Mr. Rifkin is absolutely right. Zero marginal costs are going to create a very different economy. They have already shattered the news industry as well as the music industry. (Who buys CD’s these days?) The problem that I have not heard him address is what happens in this new economy where no-one pays or wants to pay for the fixed costs.


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