Front Page Titles (by Subject) Internal Costs, Equilibrium, and Quasi-Rents - Cost and Choice: An Inquiry in Economic Theory, Vol. 6 of the Collected Works
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Internal Costs, Equilibrium, and Quasi-Rents - James M. Buchanan, Cost and Choice: An Inquiry in Economic Theory, Vol. 6 of the Collected Works 
The Collected Works of James M. Buchanan, Foreword by Geoffrey Brennan, Hartmut Kliemt, and Robert D. Tollison, 20 vols. (Indianapolis: Liberty Fund, 1999-2002). Vol. 6 Cost and Choice: An Inquiry in Economic Theory.
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Internal Costs, Equilibrium, and Quasi-Rents
The conditions under which these outlays may be taken to measure, even indirectly, the subjective barrier to choice must be carefully specified. These are as follows: (1) The individual, or firm, must be in full competitive equilibrium with respect to the activity that generates the external diseconomy; (2) at this equilibrium level of activity, and only at this level, losses are avoided and no profits are made; and (3) there are no profits in prospect of being made anywhere else in the economy. Under such conditions, the costs that may be avoided are simply the outlays that must be made. The individual, or firm, has available only one alternative loss-avoiding course of action which is that of not acting. In the latter, he avoids the outlay that the decision to act, considered in total or at the margin, requires. Not acting is clearly the most attractive alternative course of behavior here since all other alternatives must yield net losses.
It is important to note that quasi-rents cannot exist in the competitive equilibrium required in this model. The device of capitalizing differential resource capabilities into quasi-rents so as to equalize costs among separate firms cannot, therefore, be utilized. If it is to exist at all, the bridge between choice-influencing costs and objectively measurable outlays depends critically on the absence of quasi-rents. If such rents exist, either with respect to the personal behavior of an individual or with respect to the productive activity of a firm, there can be no presumption that anticipated outlay measures subjective opportunity costs, those that must influence actual choice behavior. The indirect linkage between subjective opportunity costs and objectively measured outlays which such equilibrium establishes is shattered. The reason is that in the presence of “quasi-rents,” the individual or the firm has available more than one loss-avoiding alternative course of action. “Quasi-rents” or their equivalent provide a cushion which allows subjectively relevant elements of the decision calculus to become meaningful. As Frank Knight recognized, even if imperfectly, in his 1935 papers,4 the allowance for any nonpecuniary aspects in the choice calculus of an individual or a firm plays havoc with the use of measurable outlays as surrogates for the opportunity costs that do, in fact, influence choice behavior. For our purposes at this point, the allowance of “quasi-rents” or their equivalent destroys the underlying logic of the Pigovian policy norms. There is simply no means to make an effective translation between the subjective opportunity costs that influence decision and the objectively measurable outlays that both the decision-taker and others who are externally affected undergo as a result of decision.
[4. ]F. Knight, “Notes on Utility and Cost” (Mimeographed, University of Chicago, 1935). Published as two German articles in Zeitschrift für Nationalökonomie (Vienna), Band VI, Heft 1, 3 (1935).