Reference no: EM133090225

The USPS has had $45 billion or so in cumulative accounting losses over the past four decades or so (see its financials) Was what the USPS produced over the past four decades worth $45 billion to the taxpayers? Take a for-profit business like FEDEX. We know the value of the company's inputs; that's easy, we can look at their expanses. Now, what is the value of what they produced? Let's assume for a second that what they produced is a private good with no externalities. Let's also assume that the value of its services to customers matched or exceeded the amount its customers paid for its services. This is a reasonable assumption, because if it weren't the case, customers wouldn't voluntarily engage in transactions with the company. So, what is the value of what FedEx Produced? In this case, it would be its revenue plus the difference between what customers paid for FedEx's services and the value they placed on those services. This difference is called consumer surplus. So the value of what FedEx produced in a given year would be its revenue plus the consumer surplus it generated. To see if they created any economic value, you would subtract expenses from this total.

Where does profit enter this equation? Note the following ( Revenue +Consumer Surplus) - Expenses = (Revenue - Expenses) + Consumer Surplus = Prot/Loss + Consumer Surplus = Economic Value Created. Why isn't profit/loss, by itself, enough to determine if economic value has been created? Why isn't profit/loss enough to determine if an organization is "efficient" or not?