Should The Federal Reserve Set Zero As The Target For Inflation? Essay, Research Paper

To fully evaluate the arguments concerning any debate one must possess a level of objective background information concerning the issue. For this information, I asked the questions: Why was the FED created? And, what causes Federal Reserve members to respond the way they do? For the answers to these questions, and others, I looked to our text, the Federal Reserves Banking web page, and to other related articles suggested on the South Western online debate page such as an insightfully candid speech transcript from Alan S. Blinder the Vice Chairman Board of Governors of the Federal Reserve System in 1995.Although the original authority to regulate the value of money was granted to Congress by the in the U.S. Constitution, this authority was shifted to the Central Bank of the United States at the turn of the 20th century. In December 1913, to reduce volatility and prevent financial crisis during the country s rapidly economic expansion, The United States Congress created the Federal Reserve Banking System. Without a central bank system, a dilemma was created for independent banks. In good times, banks cannot get enough currency to protect the credit money they created by granting loans. In bad times, banks have to call loans to amass cash reserves. Congress realized by regulating the money supply, a central bank could raise or lower the cost of borrowing and therefore alleviated this problem. Thus, the Federal Reserve Act was passed and signed into law by Woodrow Wilson. According to it s homepage, the central bank of the United States was said to be originally, founded to provide the nation with a safer, more flexible, and more stable monetary and financial system. While its primary goals may have not changed that much, the Federal Reserve Banking system s roles have been broadened, providing an increased freedom and level of responsibility than the Central Bank of the past. Over the years, stability and growth of the economy, a high level of employment, stability in the purchasing power of the dollar, and reasonable balance in transactions with other countries have come to be recognized as primary objectives of the Fed s governmental economic policy. Under current law, the U.S. Congress defines the desired direction, and then allows the Federal Reserve the room for maneuver to get the job done. Today the Federal Reserve’s duties fall into four general areas: (1) conducting the nation’s monetary policy;(2) supervising and regulating banking institutions and protecting the credit rights of consumers; (3) maintaining the stability of the financial system; and (4) providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions. The first of these duties–monetary policy– is perhaps one of the most controversial and serves as the focus of this debate. In a speech he delivered at a business forum, in Minneapolis, Minnesota Alan S. Blinder– the Vice Chairman Board of Governors of the Federal Reserve System re-examines the pursuit of monetary policy as granted by the Federal Reserve Act amendment of 1970. Blinder stipulates, The Federal Reserve Act tells us to pursue both “maximum employment” and “stable prices. (Blinderhttp://woodrow.mpls.frb.fed.us/pubs/region/reg959a.html It is in this effort to achieve maximizing employment and minimizing inflation levels that a controversy arises. The problems that abound when a high level of people willing to work cannot find employment are quite self evident, the problem of unstable prices, or inflation, in economy is not so obvious. The discussion of price stability involves inflation and deflation of currency in an economy. Inflation is an increase in the level of nominal prices relative to real value in an economy. Therefore, inflation results in less purchasing power for the same amount of money. Inflation has many causes, but they all operate to eventually raise the demand for goods and services beyond the capacity of the economy to satisfy that demand. Inflation and its pressures are detrimental to an economy in many ways. Rebecca Hellerstein compiles several examples of these economic impacts from various economist and other sources in a Boston Fed online article. Inflation has the unfavorable characteristic of distorting, manipulating, and complicating decision-making and practices for all actors in an economy, which in turn, has been proven to slow that economy s growth. Its devious influences on decision-making have caused many Americans and American firms to make bad judgments calls in the past. This trepidation of the unexpected convolutes factual perceptions and creates unbalance in the freehanded equilibrium functions of a capitalistic economy. The influences of inflation on the financial endeavors of individual consumers are great. According to Rebecca Hellerstein, Americans are most concerned that inflation may lower their standard of living — that their incomes will not keep up with the rise in prices. (Hellerstein:http://www.bos.frb.org/economic/nerr/rr1997/winter/hell97_1.htm) Inflation has the power to change the worth of taxes, saving and investment, home and property value, and wages in a relatively short amount of time. This is due to the deferential created between real and nominal measurements. Investment income is taxed based on its nominal rather than inflation-adjusted or real value. Inflation also increases the complexity of calculating financial assets worth including CDs, insurance policies, savings, stocks, and bonds.While its pressures on private consumers are towering, the overall impact on the business community s ability to make informed financial decisions is equally high. Internally in companies, higher inflation can misrepresent sales data in relation to profits, often causing lower productivity and poor evaluation of true performance. In addition, the correlations between consumption, inflation, and taxes causes speculative buying habits send mix signals to producers. As Rebecca explains, this is most notable true in the housing market. Because tax deductions for mortgages are tied to nominal value, homebuyers eagerly rushed to purchase during higher interest rates to receive higher deduction that in a economy with lower inflation. This message causes homebuilder suppliers to make decision based on a false message of communicated demand. As inflation rates fluctuate lower, the demand diminishes and a shock wave was sent across the industry. Inflationary expectations also play a major role in the formulation of all types of long-term contracts.THE ZERO INFLATION DEBATE: If the Federal Reserve commits to an explicit plan for price stability, the transition period will soon be over, and any costs that arise because of this policy change will be outweighed by the benefits. These benefits will be large and permanent, and will far outweigh the costs of getting there. (Hoskins: http://woodrow.mpls.frb.fed.us/pubs/region/REG902B.html) Eliminating inflation would be the most significant contribution that the Federal Reserve could make to the attainment of the highest possible standards of living in the United States and around the world. (Perry: http://woodrow.mpls.frb.fed.us/pubs/region/REG902B.html)These are respectively, the words of W. Lee Hoskins the President Federal Reserve Bank of Cleveland, and Robert T. Parry, the President Federal Reserve Bank of San Francisco. Likewise, this is the typical sentiment of most Federal Reserve economist concerning this debate. While the allies to the policy of this debate realize the possible costs of zero inflation, they adamantly believe that these costs would only be transitional.The benefits of zero inflation are numerous and have the ability to flow through entire economy. For the economy as a whole, economists believe that the establishment of a fixed inflationary goal will create less volatile business cycles, as the Federal Reserve gains creditability in their determined actions. On a global scale, this increased creditability will provide more trust in currencies based on a non-commodity value. Furthermore, with a determined inflation level of zero, the Federal Reserve will be able to focus on other economic goals. Other economists suggest the economy could see a rise in the GDP due to the increased tax savings that would result by eliminating the difference between nominal and real income and capital gains. The Chairman of the Joint Economic Study of April 1997, Jim Saxton, also notes that inflation reduction to zero will also serve to lower interest rates saying, A credible, sustained reduction of inflation will lower expectations of future inflation. Accordingly, the inflationary expectations component of interest rates will dissipate from the structure of both short- and long-term interest rates and interest rates will decline. (Saxton:http://www.swcollege.com/bef/econ_debate.html) In his report, Saxton goes on to explain how the turbulent financial market will reap the benefits of zero inflation by resisting the temptations to undershoot or overshoot fundamental values. Within a zero-inflation environment, long-term investments and contracts would see a dramatic increase. Private investors fears about eroding investment values are diminished and they will begin to invest for the long-term, as opposed to short-term speculative pursuits. There would an influx of spending into retirement fund as a result.Corporations are also better off, as now they will be able to plan and make decisions, since they no longer face the prospect of sudden inflationary shocks. In addition, firms are more willing to invest in research and development, and productivity-enhancing machinery and equipment. Those improvements will enable them to prosper without raising prices, producing the earnings to make further investments.With all of the benefits to the economy from such an action, one may question why hasn t this policy been implemented? As in most economic debates that question come down to a cost versus benefit analysis. And this is where the economic theorists differ.Unlike the wide spectrum of positive benefits that the zero inflation advocates propose, the efforts of opposing economist such as George A. Akerlof, S. Rao Aiyagari, William T. Dickens, and George L. Perry, believe that the scale may tip the other way. Critics of the zero inflation policy have formulated their hypothesis based two premises. First, Zero inflation will cause higher unemployment, and secondly the lower decline in already low levels of inflation could lead to a deflation for the dollar. As many other things associated with inflation, the first of these assertions deal with the divergence of the real and nominal aspects of the economy. The issue is wage levels, and in this instance, it is suggested that this gap is actual helpful to American companies, employment, and the economy.The line of reasoning for a low but existent level of inflation is summarized in an August 1996 Brookings Institution Policy Brief that suggests inflation greases the economy’s wheels by allowing firms to slowly escape from paying real wages that are too high without actually cutting the wages they pay. ( http://www.brook.edu/comm/policybriefs/pb004/pb4.htm) In times of prosperity, in a company or the labor force in general, job demand is high. In order recruit better candidates in a scare employee market, companies compete by offering slightly higher than average compensation. When the economy or the productivity of a firm declines however, the company must overcome a challenge. In order to maintain profits, the firm must cut wages or layoff people. Since the former lowers company morale, and thus productivity, the latter is the only viable alternative. These cuts in employment across industry will in turn have a spillover effect and slow the industry or economy even more. Akerlof, Dickens and Perry contend, in times of marginal inflation the real cost of these salary can be absorbed more easily without ever changing their nominal value. However, at zero inflation this would not be possible.To test their theory Akerlof, Dickens and Perry composed simulated economic model of 1000 firms that was exposed to various exhibition of economic shock to determine to correlation of lower inflation and unemployment in the economy. They discovered the cost of lowering inflation from 3 percent to zero is an increase in unemployment of between 1 and 3 percentage points. ( http://www.brook.edu/comm/policybriefs/pb004/pb4.htm) To substantiate the efficiency of this model they also compared its results with the economic activity of the Great Depression, and post World War II eras that proved consistent. Based on their finding they concluded that there are real non-transitional cost that must be paid for zero inflation.Secondly, those in opposition the zero rate of inflation policy claim that with the current inflation rate so low, deflation is now a possibility.Perhaps on even a large scale then its counterpart, deflation has many negative economic influences. According to Alan Greenspan, Deflation, like inflation, would distort resource allocation and interfere with the economy’s ability to reach its full potential. http://www.federalreserve.gov/boarddocs/speeches/19980103.htm Deflation has the ability to create confusion, uncertainty and miscommunication in all member of the economy in regards to investing, purchasing habits, production, employment and savings. The anticipated short falls in the economy and the value of its currency also may have a devastating effect on financial institutions and global trade. Economists have always speculated the bias of the indexes used to measure prices and inflation and there are many factor that contributed to this fallacious calculation. The task of determining a set quality for all goods and service produced in the aggregate is analogous to the adding of apples and oranges math dilemma we encountered in kindergarten. It cannot be done or at least not accurately. First, all methods fail to consider industry specific shocks or event based data as they influence prices. Secondly, not all areas of the economy rise and fall at the same time. The volatity in one industry may be overshadowed when combined with several unrelated industries when finding an average. Furthermore, the floods of technological advancements within specific industries are constantly reshaping those industries while making them more efficiency. This makes it difficult to compare or weigh these industries to each other. In much the same way, services are now predominate then ever before historically. They too are constantly changing to meet the desired needs of consumers, making it difficult to look at cross sectionals.Critics also argue, in the event of a recession the typical critics also say that the typical avenues pursued by the Federal reserve such as lowering interest rates to revive the economy may be ineffective as was seem when Japan encounter the same fate in the early 90 s. As a preface, I know that is na ve to base my opinion solely of the economic trends of the information age revolution. However, I strongly believe the recent economic activity of the decade has been responsible for smoothing the volatility of traditional business cycles and reshaping economics.In this debate my partiality lies with the proponency due to overwhelming benefits achievable from this action. In addition, to the credible and diverse rhetoric on the matter from high ranking policy members, the oppositions two main arguments, while both valid, were not sound. For the deflation debate, the practices over the recent economy seemed to of been overlooked. Even Alan Greenspan mentioned in January speech in 1998, the high-tech sector of our economy today, we observe falling prices together with rapid investment and high profitability. Although real interest rates may be quite high in terms of this sector’s declining product prices, rapid productivity growth has ensured that real rates of return are higher still, and investment in this sector has been robust. I respect the Akerlof, Dickens, and Perry model, and it s message as the most tangible source of evidence to support either side of the debate. Conversely, I believe that they are missing a key point of today most productive industry technology. From a Herzberg perspective of management theory, the greenback is not the only hygiene factor available to attract and satisfies new employees. The problem of high cash compensation has alleviated by the other benefits and option employers have to offer new employees. Many of the highest desire position within the past year have diversified their risk with elaborate stock option plans. In addition, the value of other goods such as health care package will move with the economy and the entire market will share their cost.

LTo fully evaluate the arguments concerning any debate one must possess a level of objective background information concerning the issue. For this information, I asked the questions: Why was the FED created? And, what causes Federal Reserve members to respond the way they do? For the answers to these questions, and others, I looked to our text, the Federal Reserves Banking web page, and to other related articles suggested on the South Western online debate page such as an insightfully candid speech transcript from Alan S. Blinder the Vice Chairman Board of Governors of the Federal Reserve System in 1995.Although the original authority to regulate the value of money was granted to Congress by the in the U.S. Constitution, this authority was shifted to the Central Bank of the United States at the turn of the 20th century. In December 1913, to reduce volatility and prevent financial crisis during the country s rapidly economic expansion, The United States Congress created the Federal Reserve Banking System. Without a central bank system, a dilemma was created for independent banks. In good times, banks cannot get enough currency to protect the credit money they created by granting loans. In bad times, banks have to call loans to amass cash reserves. Congress realized by regulating the money supply, a central bank could raise or lower the cost of borrowing and therefore alleviated this problem. Thus, the Federal Reserve Act was passed and signed into law by Woodrow Wilson. According to it s homepage, the central bank of the United States was said to be originally, founded to provide the nation with a safer, more flexible, and more stable monetary and financial system. While its primary goals may have not changed that much, the Federal Reserve Banking system s roles have been broadened, providing an increased freedom and level of responsibility than the Central Bank of the past. Over the years, stability and growth of the economy, a high level of employment, stability in the purchasing power of the dollar, and reasonable balance in transactions with other countries have come to be recognized as primary objectives of the Fed s governmental economic policy. Under current law, the U.S. Congress defines the desired direction, and then allows the Federal Reserve the room for maneuver to get the job done. Today the Federal Reserve’s duties fall into four general areas: (1) conducting the nation’s monetary policy;(2) supervising and regulating banking institutions and protecting the credit rights of consumers; (3) maintaining the stability of the financial system; and (4) providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions. The first of these duties–monetary policy– is perhaps one of the most controversial and serves as the focus of this debate. In a speech he delivered at a business forum, in Minneapolis, Minnesota Alan S. Blinder– the Vice Chairman Board of Governors of the Federal Reserve System re-examines the pursuit of monetary policy as granted by the Federal Reserve Act amendment of 1970. Blinder stipulates, The Federal Reserve Act tells us to pursue both “maximum employment” and “stable prices. (Blinderhttp://woodrow.mpls.frb.fed.us/pubs/region/reg959a.html It is in this effort to achieve maximizing employment and minimizing inflation levels that a controversy arises. The problems that abound when a high level of people willing to work cannot find employment are quite self evident, the problem of unstable prices, or inflation, in economy is not so obvious. The discussion of price stability involves inflation and deflation of currency in an economy. Inflation is an increase in the level of nominal prices relative to real value in an economy. Therefore, inflation results in less purchasing power for the same amount of money. Inflation has many causes, but they all operate to eventually raise the demand for goods and services beyond the capacity of the economy to satisfy that demand. Inflation and its pressures are detrimental to an economy in many ways. Rebecca Hellerstein compiles several examples of these economic impacts from various economist and other sources in a Boston Fed online article. Inflation has the unfavorable characteristic of distorting, manipulating, and complicating decision-making and practices for all actors in an economy, which in turn, has been proven to slow that economy s growth. Its devious influences on decision-making have caused many Americans and American firms to make bad judgments calls in the past. This trepidation of the unexpected convolutes factual perceptions and creates unbalance in the freehanded equilibrium functions of a capitalistic economy. The influences of inflation on the financial endeavors of individual consumers are great. According to Rebecca Hellerstein, Americans are most concerned that inflation may lower their standard of living — that their incomes will not keep up with the rise in prices. (Hellerstein:http://www.bos.frb.org/economic/nerr/rr1997/winter/hell97_1.htm) Inflation has the power to change the worth of taxes, saving and investment, home and property value, and wages in a relatively short amount of time. This is due to the deferential created between real and nominal measurements. Investment income is taxed based on its nominal rather than inflation-adjusted or real value. Inflation also increases the complexity of calculating financial assets worth including CDs, insurance policies, savings, stocks, and bonds.While its pressures on private consumers are towering, the overall impact on the business community s ability to make informed financial decisions is equally high. Internally in companies, higher inflation can misrepresent sales data in relation to profits, often causing lower productivity and poor evaluation of true performance. In addition, the correlations between consumption, inflation, and taxes causes speculative buying habits send mix signals to producers. As Rebecca explains, this is most notable true in the housing market. Because tax deductions for mortgages are tied to nominal value, homebuyers eagerly rushed to purchase during higher interest rates to receive higher deduction that in a economy with lower inflation. This message causes homebuilder suppliers to make decision based on a false message of communicated demand. As inflation rates fluctuate lower, the demand diminishes and a shock wave was sent across the industry. Inflationary expectations also play a major role in the formulation of all types of long-term contracts.THE ZERO INFLATION DEBATE: If the Federal Reserve commits to an explicit plan for price stability, the transition period will soon be over, and any costs that arise because of this policy change will be outweighed by the benefits. These benefits will be large and permanent, and will far outweigh the costs of getting there. (Hoskins: http://woodrow.mpls.frb.fed.us/pubs/region/REG902B.html) Eliminating inflation would be the most significant contribution that the Federal Reserve could make to the attainment of the highest possible standards of living in the United States and around the world. (Perry: http://woodrow.mpls.frb.fed.us/pubs/region/REG902B.html)These are respectively, the words of W. Lee Hoskins the President Federal Reserve Bank of Cleveland, and Robert T. Parry, the President Federal Reserve Bank of San Francisco. Likewise, this is the typical sentiment of most Federal Reserve economist concerning this debate. While the allies to the policy of this debate realize the possible costs of zero inflation, they adamantly believe that these costs would only be transitional.The benefits of zero inflation are numerous and have the ability to flow through entire economy. For the economy as a whole, economists believe that the establishment of a fixed inflationary goal will create less volatile business cycles, as the Federal Reserve gains creditability in their determined actions. On a global scale, this increased creditability will provide more trust in currencies based on a non-commodity value. Furthermore, with a determined inflation level of zero, the Federal Reserve will be able to focus on other economic goals. Other economists suggest the economy could see a rise in the GDP due to the increased tax savings that would result by eliminating the difference between nominal and real income and capital gains. The Chairman of the Joint Economic Study of April 1997, Jim Saxton, also notes that inflation reduction to zero will also serve to lower interest rates saying, A credible, sustained reduction of inflation will lower expectations of future inflation. Accordingly, the inflationary expectations component of interest rates will dissipate from the structure of both short- and long-term interest rates and interest rates will decline. (Saxton:http://www.swcollege.com/bef/econ_debate.html) In his report, Saxton goes on to explain how the turbulent financial market will reap the benefits of zero inflation by resisting the temptations to undershoot or overshoot fundamental values. Within a zero-inflation environment, long-term investments and contracts would see a dramatic increase. Private investors fears about eroding investment values are diminished and they will begin to invest for the long-term, as opposed to short-term speculative pursuits. There would an influx of spending into retirement fund as a result.Corporations are also better off, as now they will be able to plan and make decisions, since they no longer face the prospect of sudden inflationary shocks. In addition, firms are more willing to invest in research and development, and productivity-enhancing machinery and equipment. Those improvements will enable them to prosper without raising prices, producing the earnings to make further investments.With all of the benefits to the economy from such an action, one may question why hasn t this policy been implemented? As in most economic debates that question come down to a cost versus benefit analysis. And this is where the economic theorists differ.Unlike the wide spectrum of positive benefits that the zero inflation advocates propose, the efforts of opposing economist such as George A. Akerlof, S. Rao Aiyagari, William T. Dickens, and George L. Perry, believe that the scale may tip the other way. Critics of the zero inflation policy have formulated their hypothesis based two premises. First, Zero inflation will cause higher unemployment, and secondly the lower decline in already low levels of inflation could lead to a deflation for the dollar. As many other things associated with inflation, the first of these assertions deal with the divergence of the real and nominal aspects of the economy. The issue is wage levels, and in this instance, it is suggested that this gap is actual helpful to American companies, employment, and the economy.The line of reasoning for a low but existent level of inflation is summarized in an August 1996 Brookings Institution Policy Brief that suggests inflation greases the economy’s wheels by allowing firms to slowly escape from paying real wages that are too high without actually cutting the wages they pay. ( http://www.brook.edu/comm/policybriefs/pb004/pb4.htm) In times of prosperity, in a company or the labor force in general, job demand is high. In order recruit better candidates in a scare employee market, companies compete by offering slightly higher than average compensation. When the economy or the productivity of a firm declines however, the company must overcome a challenge. In order to maintain profits, the firm must cut wages or layoff people. Since the former lowers company morale, and thus productivity, the latter is the only viable alternative. These cuts in employment across industry will in turn have a spillover effect and slow the industry or economy even more. Akerlof, Dickens and Perry contend, in times of marginal inflation the real cost of these salary can be absorbed more easily without ever changing their nominal value. However, at zero inflation this would not be possible.To test their theory Akerlof, Dickens and Perry composed simulated economic model of 1000 firms that was exposed to various exhibition of economic shock to determine to correlation of lower inflation and unemployment in the economy. They discovered the cost of lowering inflation from 3 percent to zero is an increase in unemployment of between 1 and 3 percentage points. ( http://www.brook.edu/comm/policybriefs/pb004/pb4.htm) To substantiate the efficiency of this model they also compared its results with the economic activity of the Great Depression, and post World War II eras that proved consistent. Based on their finding they concluded that there are real non-transitional cost that must be paid for zero inflation.Secondly, those in opposition the zero rate of inflation policy claim that with the current inflation rate so low, deflation is now a possibility.Perhaps on even a large scale then its counterpart, deflation has many negative economic influences. According to Alan Greenspan, Deflation, like inflation, would distort resource allocation and interfere with the economy’s ability to reach its full potential. http://www.federalreserve.gov/boarddocs/speeches/19980103.htm Deflation has the ability to create confusion, uncertainty and miscommunication in all member of the economy in regards to investing, purchasing habits, production, employment and savings. The anticipated short falls in the economy and the value of its currency also may have a devastating effect on financial institutions and global trade. Economists have always speculated the bias of the indexes used to measure prices and inflation and there are many factor that contributed to this fallacious calculation. The task of determining a set quality for all goods and service produced in the aggregate is analogous to the adding of apples and oranges math dilemma we encountered in kindergarten. It cannot be done or at least not accurately. First, all methods fail to consider industry specific shocks or event based data as they influence prices. Secondly, not all areas of the economy rise and fall at the same time. The volatity in one industry may be overshadowed when combined with several unrelated industries when finding an average. Furthermore, the floods of technological advancements within specific industries are constantly reshaping those industries while making them more efficiency. This makes it difficult to compare or weigh these industries to each other. In much the same way, services are now predominate then ever before historically. They too are constantly changing to meet the desired needs of consumers, making it difficult to look at cross sectionals.Critics also argue, in the event of a recession the typical critics also say that the typical avenues pursued by the Federal reserve such as lowering interest rates to revive the economy may be ineffective as was seem when Japan encounter the same fate in the early 90 s. As a preface, I know that is na ve to base my opinion solely of the economic trends of the information age revolution. However, I strongly believe the recent economic activity of the decade has been responsible for smoothing the volatility of traditional business cycles and reshaping economics.In this debate my partiality lies with the proponency due to overwhelming benefits achievable from this action. In addition, to the credible and diverse rhetoric on the matter from high ranking policy members, the oppositions two main arguments, while both valid, were not sound. For the deflation debate, the practices over the recent economy seemed to of been overlooked. Even Alan Greenspan mentioned in January speech in 1998, the high-tech sector of our economy today, we observe falling prices together with rapid investment and high profitability. Although real interest rates may be quite high in terms of this sector’s declining product prices, rapid productivity growth has ensured that real rates of return are higher still, and investment in this sector has been robust. I respect the Akerlof, Dickens, and Perry model, and it s message as the most tangible source of evidence to support either side of the debate. Conversely, I believe that they are missing a key point of today most productive industry technology. From a Herzberg perspective of management theory, the greenback is not the only hygiene factor available to attract and satisfies new employees. The problem of high cash compensation has alleviated by the other benefits and option employers have to offer new employees. Many of the highest desire position within the past year have diversified their risk with elaborate stock option plans. In addition, the value of other goods such as health care package will move with the economy and the entire market will share their cost. L