Chapter 44: Orchestras
William A. Luksetich Baumol and Bowen (1966) painted a dismal future for the performing arts in general and symphony orchestras in particular. In their view, costs of staging performances would increase at a faster rate than would their earned income because opportunities for cost reductions are limited. Contributions would probably not increase at a rate sufficient to cover this growing ‘income gap’; hence the presence of a ‘cost disease’ affecting organizations in the performing arts. Consequently, private and government subsidies are inevitable if orchestras are to continue to operate as in the past. They noted subsidies to the arts could be justified: ‘If one agrees that the performing arts confer general benefits on the community as a whole . . . the arts are public goods whose benefits demonstrably exceed the receipts one can hope to collect at the box office’ (ibid., pp. 385–6). Hansmann (1981) disagrees, arguing that organizations in the performing arts are not for profit because they face high fixed costs and a relatively small demand. Moreover, their fixed costs have risen faster than their variable costs and revenues. They must rely on a system of price discrimination if they are to cover their costs, because there is no one price that will exceed their average total cost. Consequently, a system of price discrimination has developed whereby the price is set in the inelastic range of demand with the expectation that patrons will voluntarily make a tax-deductible donation to the organization. Cost disease: empirical tests and evidence Baumol and...
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