INTERNAL ECONOMIES.

THIS paper is concerned with a phenomenon which is constantly encountered bur seldom analysed. An internal economy or diseconomy would be external but for the fact that in occurs within a given firm or organisation. Consideration of this question raises others: the nature of cross-subsidisation, the meaning of organisational economies of scale, the identification of marginal revenue and marginal cost within systems of economic activity, the importance of the institutional setting in identifying costs and benefits, the criteria applicable to the operations of nationalised industries and much else besides. All the problems to be discussed below have been referred to somewhere in modern economic literature. Such words as indivisibilities, complementarities, sub-optimisation, interdependencies, which do raise similar issues, are to be found in many a textbook, bur all too often figuratively or literally in footnotes. They are seldom woven into the fabric of analysis. Once mentioned, they are forgotten by author and student, and the analysis, the concept of an optimum, proceeds as if these modifying circumstances did not exist, or could be abstracted without serious loss of theoretical rigour or practical relevance. What, then, is cross-subsidisation ? What is its relationship to "internal economies" as here defined ? The belief in the irrationality of cross-subsidisation is based on the apparently elementary principle that a loss-making activity involves resource misallocation, in that, in a market economy, one can increase the national product and welfare by reallocating resources to a profitable use. it is believed that the temptation to subsidise losses out of profits within a corporation or nationalised industry ought therefore to be resisted. Such a temptation may be due to a desire for a quiet life; thus the closing of uneconomic pits might cause questions in Parliament of a protest march by miners. [ABSTRACT FROM AUTHOR]