Discussion post 5

There is a file attached to answer the following 6 quesitons listed below:

Question 1: What do the USPS’s financials tell you about whether or not (a) it creates economic value, (b) is more or less efficient than UPS or FedEx, and (c) needs to reexamine its business model? Explain your answer.

A couple comments to get you started on this:

Economic Value:

Economic value is created when a producer combines inputs such as labor, capital, raw materials, and purchases components to make a product the perceived benefit B of which exceeds the cost C incurred in making the product. The economic value created is the difference between the perceived benefit and cost, or B less C.

Public Park Example:

All the residents in a particular neighborhood get together and decide to build a neighborhood park. They determine that the cost of building the park ($450,000) and maintaining it for a year ($50,000) comes to $200 per resident (2500 residents). Because the individuals in the neighborhood believe that they will each derive $300 in value annually from the park, they decide to build it. Everything goes as planned. In the first year, the neighborhood collects $500,000 from residents, and then builds the park. Revenue from the park in Year 1 is $0. From a accounting perspective, therefore, the park “loses” $50,000 (maintenance costs) and the cost of the fraction of the park that is "used" during the year (let's assume a 30-year amortization, so $15,000) for a total loss of $65,000 in its first year of operation.Has any economic value been created? Why or why not? There is a nearby for-profit water park that was profitable during the same time period. Is the neighborhood park more or less “efficient” than this water park? Finally, does the neighborhood need to rethink its business model as a result of its $65,000 dollar loss in Year 1?In Year 2, the neighborhood decides to charge $1 per day for access to one part of the neighborhood park--the splash pad. All other areas of the park remain open to the public. In Year 2, therefore, the neighborhood realizes $20,000 in revenue. The cost to maintain the park in Year 2 remains the same ($50,000). This results in a “loss” of $45,000 for Year 2. Did the park create more or less economic value in Year 2 than in Year 1?

Think about how you would answer these questions about this neighborhood park, then think about how this might apply to the USPS.

Question 2: What positive externalities does USPS produce, and how has the value of these externalities changed over time?

Question 3: Explain how you would calculate the economic value created by the USPS, taking into account the positive externalities it produces.

Here's a few comments:

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 expenses. 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.Bonus questions: Where does profit enter this equation? Note the following: (Revenue + Consumer Surplus) - Expenses = (Revenue - Expenses) + Consumer Surplus = Profit/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?

For example, assuming that everything stays the same with respect to its operations and its volume of business, how FedEx prices its goods and services doesn’t change the amount of economic value it creates. If FedEx raises its prices (and its volume of business stays the same), it may increase its profits, but it would reduce consumer surplus by the same amount, so it would be a wash. What if FedEx lowered its prices below its costs? It would lose money, but the decline in revenue would be offset by a corresponding increase in consumer surplus, so the economic value created by the company would, again, remain the same. In this example, assuming the volume of business stays the same, FedEx’s pricing decisions affect the allocation of value—i.e. how the value created by the company is split between itself and its customers—but it doesn’t effect the overall amount of value the company creates.

The USPS doesn’t produce a private good, like we assumed in the case of FedEx. What it produces is a merit good, defined as a good or service that has both private benefit and associated positive externalities. This adds another layer of complexity to a strategic assessment of the USPS.

Question 4: What capabilities and competencies does the USPS have that would enable it to create economic value by offering financial services? Would creating economic value this way “fit” with the USPS’s overall purpose, culture, and history? Why or why not? Explain.

Question 5: If the USPS were to begin offering financial services, how would it impact its revenue, the consumer surplus it creates, and the positive externalities associated with its operation? Discuss potential impact on each of these three value components.

Question 6: Should the USPS begin offering financial services? Why or why not?