Return to Answer

First, your math and some arguments are off. The price is not arbitrary high as it still depends on demand. Its not like they could charge billion dollars per ticket if maximum willingness to pay of any consumer is \$10. Next, the math is off because government in case you are talking about would have to pay \$1 per ticket, meaning government subsidy would have to be \$9.

In your case there is no way how to identify who are the marginal consumers. If there was already the theater itself would just price discriminate and charge lower price to those customers. If this is possible theater maximizes profit by charging first 5 people price 2 and next four 1 and earn \$14 profit, and also the last ticket could be sold for whatever the next person is willing to pay, which would also maximize total surplus of society (which is CS+PS).

So for your scheme to work government would have to subsidize each ticket by \$1 and total cost of subsidy would be \$1 x 9= \$9.

What even more government is not just an endless well of resources one can tap to. Government gets money through taxation or borrowing or seigniorage (i.e. $G=T+B+\theta$). I will focus only on taxes, because otherwise this answer would get too complicated, the answer loosely actually applies to all three cases although mechanism in each case are different.

In order, to pay out that subsidy government would have to levy some tax and most taxes are distortionary. This means that tax usually causes greater costs to the economy than the value collected. So to pay for \$9 subsidy government first has to take away \$9 dollars of surplus from some market from someone, and in addition usually, save special cases, there will be additional \$X cost (the amount of X depends on market conditions). Borrowing is just intertemporal reshuffling of taxes, and seignories is hidden tax on anyone with money, they both generally lead to some sort of deadweight loss at some particular markets.

So you are getting \$7 extra surplus by paying \$9+\$X surplus.

This being said the subsidy can be justified on normative grounds. For example, if you take away \$9 + \X surplus from coffee market, to subsidize theater market, because you believe theater market participants are so much deserving of that \$7 surplus it justifies taking \$9 of surplus from people engaged in coffee market then the policy makes sense. But it is typically negative sum game.

So you can't just immediately jump to conclusion just because you anecdotally see empty bus or theater.

First, some of your arguments are off. The price is not arbitrary high as it still depends on demand. Its not like they could charge billion dollars per ticket if maximum willingness to pay of any consumer is let's say \$10.

Next;

So you can't just immediately jump to conclusion just because you anecdotally see empty bus or theater.

As a consequence,

In real life:

1. it is difficult to see if a capital is underutilized. This requires rigorous research that would have to be done for the same unit of capital periodically.

2. it is difficult to know what a demand is, so it is difficult to know what lump-sum subsidy has to be offered. Demand can be estimated, but demand changes across time so this would again have to be done periodically.

3. Even with the best and most precised state of art method there will always be uncertainty about those estimates.

4. as a consequence of 1 or 2 and 3, but primarily 3, there would have to be periodic negotiations between government and firms on this lump sum. This would incur further transaction cost.

For example, in US there must be thousands of theaters, and it would be very difficult to do 1-4 for all of them. There probably are not even enough experts to do just 1 or 2 for them.

First, your math and some arguments are off. The price is not arbitrary high as it still depends on demand. Its not like they could charge billion dollars per ticket if maximum willingness to pay of any consumer is \$10. Next, the math is of because government in case you are talking about would have to pay \$1 per ticket, meaning government subsidy would have to be \$9.

In your case there is no way how to identify who are the marginal consumers. If there were already the theater itself would just price discriminate and charge lower price to those customers. If this is possible theater maximizes profit by charging first 5 people price 2 and next four 1 and earn \$14 profit, and also the last ticket could be sold for whatever the next person is willing to pay, which would also maximize total surplus of society (which is CS+PS).

First, your math and some arguments are off. The price is not arbitrary high as it still depends on demand. Its not like they could charge billion dollars per ticket if maximum willingness to pay of any consumer is \$10. Next, the math is off because government in case you are talking about would have to pay \$1 per ticket, meaning government subsidy would have to be \$9.

In your case there is no way how to identify who are the marginal consumers. If there was already the theater itself would just price discriminate and charge lower price to those customers. If this is possible theater maximizes profit by charging first 5 people price 2 and next four 1 and earn \$14 profit, and also the last ticket could be sold for whatever the next person is willing to pay, which would also maximize total surplus of society (which is CS+PS).

In order, to pay out that subsidy government would have to levy some tax and most tax are distortionary. This means that tax usually causes greater costs to the economy than the value collected. So to pay for \$9 subsidy government first has to take away \$9 dollars of surplus from some market from someone, and in addition usually, save special cases, there will be additional \$X cost (the amount of X depends on market condition). Borrowing is just intertemporal reshuffling of taxes, and seignories is hidden tax on anyone with money, they both generally lead to some sort of deadweight loss at some particular markets.

This being said the subsidy can be justified on normative grounds. For example, if you take away \$9 + \X surplus from coffee market, to subsidize theater market, because you believe theater market participants are so much deserving of that \$7 surplus it justifies \$9 then the policy makes sense. But it is zero sum or negative sum game.

In order, to pay out that subsidy government would have to levy some tax and most taxes are distortionary. This means that tax usually causes greater costs to the economy than the value collected. So to pay for \$9 subsidy government first has to take away \$9 dollars of surplus from some market from someone, and in addition usually, save special cases, there will be additional \$X cost (the amount of X depends on market conditions). Borrowing is just intertemporal reshuffling of taxes, and seignories is hidden tax on anyone with money, they both generally lead to some sort of deadweight loss at some particular markets.

This being said the subsidy can be justified on normative grounds. For example, if you take away \$9 + \X surplus from coffee market, to subsidize theater market, because you believe theater market participants are so much deserving of that \$7 surplus it justifies taking \$9 of surplus from people engaged in coffee market then the policy makes sense. But it is typically negative sum game.