Industries subject to continuous technological change have three
common characteristics. The first is that plants of different ages and with
different costs co-exist in the industry. In the steel and newsprint
industries, for example, there are ongoing and gradual technological
improvements, and thus it is common for new plants to have considerably
lower costs than the plants built several years earlier. Most of us do not
see these differences, however, because we rarely if ever visit production
facilities in these industries. But the same characteristic is dramatically
displayed in an industry that most of us observe casually through our car
windows—agriculture. You will probably have noticed different farms
with different vintages of agricultural machinery; some farms have much
newer and better equipment than others. Indeed, even any individual
farm that has been in operation for a long time will have various vintages
of equipment, all of which are in use. Older models are not discarded as
soon as a better model comes on the market.
Critics who observe the continued use of older, higher-cost plants and
equipment often urge that something be done to “eliminate these
wasteful practices.” These critics miss an important aspect of profit
maximization. If the plant or piece of equipment is already there and has
little or no resale value, it can be profitably operated as long as its
revenues more than cover its variable costs. As long as a plant or some
equipment can produce goods that are valued by consumers at an amount
above the value of the resources currently used up for their production
(variable costs), the value of society’s total output is increased by using it.