High profits are a result of scarcity power

Tags: economics profit scarcity

When it is easy for new competitors to enter an industry, high profits typically mean that a business really does offer some scarce, valuable resource (e.g. superior service or product). In this case, the market is operating efficiently [1].

However, if it is difficult to enter an industry, either due to licensing requirements, regulations, or high cost to entry ("green belts"), then that scarcity is artificial and the market is acting inefficiently.

References

  1. Harford, Tim. The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor--and Why You Can Never Buy a Decent Used Car! Oxford ; New York: Oxford University Press, 2006.