The comment by Edwin West addresses my 1984 benefit-cost analysis and, more specifically, its conclusion that the subsidy received by the Royal Shakespeare Company (RSC) is justified. West maintains that a broader inquiry may reverse that judgment, and he raises three main points for discussion: deadweight loss, pseudo demands, and benefit distribution. I shall consider these matters seriatim. First, however, it should be recalled that the original analysis took a narrow stance deliberately and that footnote 14 conveyed the message. Because of difficulty in determining how much patronage went to Aldwych and Stratford activities alone, RSC patronage obtained from all sources, public and private, was treated as if it applied only to those two centers. But, besides performing there, the RSC, over the financial years 1968-69 to 1977-78, worked The Warehouse, The Other Place, Theatregoround and other domestic tours, overseas proscenia, and television inter alia. Therefore assigning total patronage exclusively to the centers imparted a bias that favored the case against the subsidy. Nevertheless, the investigation did omit deadweight loss. Prompted by West's remarks on the subject, I resurrected the data to try to obtain a rough but reasonable estimate of Aldwych and Stratford patronage. In the exercise, patronage was distributed conceptually across all RSC activities on the premise that each activity shared the total in the same proportion that it shared total expenses.' No attempt was made to separate private gifts from public ones. Table 1, which presents the pertinent details, indicates that nominal patronage going exclusively to the centers averaged ?513,778, about 85 percent of the total. With the mean of the Retail Price Index amounting to .801, this figure becomes ?641,421 in real terms. Benefit, the increase in real consumers' surplus at the centers, still registers ?900,204 enabling the benefit-cost ratio to rise from 1.18 to 1.40.2 These calculations ignore an important side effect of the subsidy; namely, the additional tax collections coming from both increased ticket sales and increased labor income. As the earlier Table 3 indicated, a profit-maximizing Aldwych sells 16,528 tickets at a real price of ?3.78 including the value-added tax (VAT). A VAT rate of 8 percent, not inappropriate for the period in focus, therefore means a pretax real price of ?3.50 and a real VA T levy of ?0.28 per ticket for a total of ?4,628. Under actual (subsidized) conditions the Aldwych sells 234,045 tickets at a real tax-inclusive price of ?1.77 and pays a real VAT of ?30,426, an increase of ?25,798 over the profit maximizer. Similarly, actual Stratford generates ?9,153 more in real VAT than does a profit-maximizing Stratford bringing the combined VAT increase to ?34,951.3 Table 3 likewise showed that patronage expands employment by 461,448 man-hours at

The notion that the price of substitutes serves as a determinant of lively arts demand is hardly new. It dates back decades at least to the seminal work by William Baumol and William Bowen (1966, p. 244), who contended that movies substitute for live performances. Susan Touchstone (1980, p. 36), examining lively arts demand in the United States, followed the lead of Baumol and Bowen by defining substitute price in terms of movie admission, while Glenn Withers (1980, p. 739), also for the United States, cast it in terms of reading or recreation. I (1984, p. 462) considered both types of measures in connection with a study of the demand for Shakespeare in Great Britain. But surely if movies or reading or recreation are substitutes for the lively arts, then so are those arts themselves. Should Richard II become dearer, an individual might elect to attend La Boheme or Fidelio or Swan Lake rather than to sit through Superman II. The lively arts are not homogeneous. Each has its own set of characteristics, and consequently substitutes lie within the arts spectrum. Apart from fleeting acknowledgment by, say, Alan Peacock (1981, p. 3), this point has been ignored by demand analyses to date. It is not ignored here.