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Source link: http://archive.mises.org/16932/the-myth-of-natural-monopoly/

The Myth of Natural Monopoly

May 13, 2011 by

The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists. FULL ARTICLE by Thomas J. DiLorenzo


JoshINHB May 13, 2011 at 11:17 pm

What about water delivery and sewage removal?
Or city streets?

Gil May 14, 2011 at 3:50 am

The only answer I can think of are: water will have to delivered – presumably there’d be bottled water for drinking and ho-hum water poured from a truck into a tank for everyday usage. Similarly with sewerage the septic tank would come back in style – every so often a truck would have come in and take the used tank away of if it’s a fixture then pump it empty. Finally, although I can imagine highways being private the problem with street is if they’re held by a private company then the owner could box in someone they don’t because if they leave their house they’re trespassing. The solution would be the streets and roads are owned by the home owner – every home and building owner has flat border around their place as an easement so everyone else can move through and no one can be classed as trespasser while staying on the easement.

nate-m May 14, 2011 at 6:11 am

The real solution for new developments is pretty obvious.

One place I lived it was common for housing developments to be created outside of city limits. A development company would come in, purchase the land, and then build the infrastructure. They would build the roads, build the sewage, build the electrical system. .All built using private money by private companies by private developers who would then sell lots off of it..

Then the purchase agreement for the house included fees to maintain the roads, the sewage, trash, snow removal, and the electrical systems of the neighborhood. Periodically outside companies would submit bids for maintaining these services. .

It was expected eventually that the small communities would be annexed by the city and brought into the city limits. Many of these communities resisted this because it meant a dramatic rise in fees… which became taxes, and a dramatic loss in quality of service. .

I witnessed this happen to my house as a high schooler. We went from a trash collection company that would take anything and everything.. couches, lawn stuff, etc etc… to a city selected business that required trash sorting, took only a limited number of trash bags, had severe size and weight restrictions, required trash bags to be clear, and refused to collect yard wasted. We went from a neighborhood that had our streets plowed instantly once snow fell to a neighborhood that would see snow sit around for weeks and turn to ice with only minimal service. People would miss work simply because they were now unable to leave the neighborhood.

Prior to that we lived in the country. Had our own household sewage system… called a septic tank .Human waste and other things naturally rots. So you just create a holding tank were it can rot and it just mostly goes away. The water then can leach into the surrounding soil just fine. We even have special bacteria cultures that you’d flush down the toilet to encourage the process. Periodically you have a septic tank company come out and clean out all the waste that wouldn’t rot all the way.

We also had our own private well. I had the pump for it underneath the floor of my closet. We’d bring in water samples periodically to get it tested.

Of course that sort of thing wouldn’t work in densely populated areas..

There have been a lot of speculation how a pure capitalistic society would look.

It’s extremely likely that it would end up like the tiny kingdoms that were created in early medieval Europe. Were you have family dynasties that own and manage communities.

Say you get hired on to a new business and need a place to live.. then large employers would simply give you a house they own close to place you work. They would own the apartments or houses and you would probably get better living conditions based on the ranking in your company.

For smaller businesses that couldn’t manage a community for their employers then you’d have professional companies that would manage towns. They would provide the money for all the infrastructure and services and your employer would pay for you to live there, or you could rent out houses or apartments on your own.

My house I currently own, even though I live in another state for (I follow the money), is in a town that was originally built by a individual. He was a successful businessman, but lousy politician. He wanted to be Mayor bad enough (I guess) that he took his savings, moved to the midwest, bought a bunch of land, and simply built a city from scratch.

This was not uncommon while the states were still territories. Corporate towns were common and many towns started off as mining communities or whatnot .

Also many people figured that ‘hey this is going to be a important place in a few years’ and then simply took their savings, got a huge amount of land, and built small towns. If they were successful then they would get very wealthy from the shops paying rent and the increase in value from the land.

But that’s probably how it world work out. Cities would be divided up into much smaller areas, each one controlled or ran by this or that family or corporation. If you don’t like how your treated in one area (and your not wealthy enough to fully take care of services on your own) you have the option just to pack up and move a few blocks to another one. If you want to own a house, but can’t provide all your own services, then you join a housing association that would pool money to do it.

That sort of thing. Most services wouldn’t be provided directly by the people that own the land, of course. But you’d have a large number of small companies that travel around and provide services that other companies need. Much like anything else.

For any new construction and any new cities all this sewage stuff and other details would be easily taken care of.

The biggest problem would be large cities that are heavily over populated. Any sort of change to a anarchistic system would be painful. Hell, it’s painful now. They are designed to concentrate power into the hands of a city government. Changing that would be difficult.

The solution would probably end up that a significant portion of the populations of these cities would simply leave until the land value fell enough that speculators and entrepreneur.

I already see significant potential in areas like Detroit Michigan. It’s a established city with a significantly depleted population. If all of a sudden that area of the country was to see regulations and taxation go away in a massive manner then that would provide for a golden opportunity for businesses to buy up large tracts of land and revitalize it.

If the freedom caused a huge economic renaissance of the area then if somebody was to buy up neighborhoods and provide quality water, electrical service, sewage, trash removal, road maintenance, and security then that would provide a huge potential source of profit as populations start to return. Of course as a neighborhood building corporation I wouldn’t provide most of that stuff on my own, but contract it out. All depending on what was most economical.

Think of all the services you could provide for other major businesses! They don’t want their employees bogged down with gathering food, laundry, transportation, child care, or a whole host of other stuff. You want them to have lots of free time (for doing extra work and getting paid extra) and well rested and happy. :) Many businesses would be happy to pay significantly for the increase in productivity it would cause. Especially when you get economy of scale. A employer could pay for services for a few hundred people at a time that would far surpass what people could individually afford on their own. House cleaning services, professional chefs providing food. More specialization in the population means more efficient and productive population.

So on and so forth.

Gil May 14, 2011 at 11:55 am

It’s easy to imagine that an anarchic “society” would eventually become city-states thus starting the process all again.


nate-m May 15, 2011 at 9:47 am

I don’t agree with his conclusions, but city-states wouldn’t be that bad. I could live with that.

Daniel May 16, 2011 at 1:16 am

I understand this “problem” but I can’t say I care much for it or about it.

It’s kind of like the private defense problem; someone will always ask “but what if one company gets all the customers and establishes a monopoly and forcibly charges payment?”

In that case, we’d be back where we are now.

AIK May 15, 2011 at 8:12 am

Water delivery and sewage removal could still be made through pipes in the ground owned by private companies who purchased or leased easements to do so from private property owners. Why would a private street owner not want to lease such an easement?
In the case of city streets, any property with a prior access to the street automatically gains an easement granting full access and use of the street. The private owner of a street cannot remove such easements on their street without the full consent of the affected property owner. These problems have all been thoroughly dealt with in the Austrian Literature available for free on this site.

David May 14, 2011 at 12:42 am

Excellent. I’m bookmarking this to show a friend who I could not seem to convince that markets do not produce natural monopolies.

Ethan May 14, 2011 at 4:29 am

One simple solution that local residents might develope for these local access and utility issues is the private joint stock company. Many communities have done this a century or so ago. What are people buying the stock with? A little chunk of land. What do they gain? A market driven, locally responsible utility or local road company. What current benifitaries “suffer” as a resault? Non local road exploiters who must now, more likely than not, pay for access to the local road. Neighboring communities my make certain code/fee sharing arrangments, but ownership and local decision making power would most likely be restrained unless benefits from a merger were really that great.

Freedom Fighter May 14, 2011 at 8:21 am

“digging up the streets to put in dual gas or water lines.”

So, when it comes to such infrastructures, the first one arriving on the scene wins. And as time goes by, the initial investment costs is being paid off and output costs less and less to produce, so any would be competitor would face an efficient, low cost, established producer with lots of cash flow and cash reserves.

A homestead monopoly ?

augusto May 15, 2011 at 9:08 am

You’re assuming the pipelines belong to the company providing the service, hence the problem you allude to.

But you can just as easily imagine a gated community where homeowners own a stake in the common ground. The infrastructure belongs to the pool of homeowners, and they offer the infrastructure operation rights to the highest bidder for a fixed period of time.

nate-m May 15, 2011 at 9:53 am

Yeah.. the person that owns the property does not have to be the same that offers the services.

Saying that the person providing the services owns the property is like saying ‘I cannot have more then one carpet cleaning service because that would require having multiple full room carpets in my living room’.

It’s that way with electricity. You have a electrical grid system with a variety of people providing electrical power. With modern technology it’s possible to meter accurately how much electricity is coming into the system from each player and accurately measure what the outputs are. You have multiple path ways electricity can go… this way, using modern technology, electrical providers can provide competitive services without all the redundancy and inefficiency that many statist-friendly economists propose. Thanks to improvements in technology and innovation electrical providers are no longer a ‘natural monopoly’, if they ever really were….

ELIZABETH IDIKULA May 15, 2011 at 10:58 am

The knowledge that governments created monopolies in a time when majority of economist knew that ‘large-scale, capital-intensive production did not lead to monopoly, but was an absolutely desirable aspect of the competitive process’ and then justifying their act using the ex-post rational of natural monopolies, is downright disturbing. In fact, textbooks still claim that the solution to natural monopolies, is government intervention. In the race to be the first supplier in the market, it is almost typical to find governments resorting to ‘cheap tricks’ like laws and regulations, thereby claiming their rights to the market.

However, there is still one more stone left unturned. What about markets where there are no private sector competitors?

In so called ‘developing countries’, where public utilities are plagued by inefficiencies; frequent and indefinite power and water outages, leakages etc., it is often the case that there are no private sector bidders simply because they lack the required initial investment, thus forcing the governments to step in.

What about areas where governments are the most efficient among alternatives?

Consider the water industry in England in the 19th century. Up until the mid-nineteenth century, Parliament discouraged municipal involvement in water supply; in 1851, private companies had 60% of the market. Competition amongst the companies in larger industrial towns lowered profit margins, as companies were less able to charge a sufficient price for installation of networks in new areas. In areas with direct competition (with two sets of mains), usually at the edge of companies’ territories, profit margins were lowest of all. Such situations resulted in higher costs and lower efficiency, as two networks, neither used to capacity, were used. With a limited number of households that could afford their services, expansion of networks slowed, and many companies were barely profitable. With a lack of water and sanitation claiming thousands of lives in periodic epidemics, municipalisation proceeded rapidly after 1860, and municipalities were able to raise finance for investment, which private companies often could not. A few well-run private companies that worked together with local towns and cities (gaining legal monopolies and thereby the financial security to invest as required) did survive, providing around 20% of the population with water even today, while municipalities controlled the rest.

My stance on the matter is that the private sector should be allowed free, unregulated entry into markets where they are vying to compete, usually bringing with them competitive pricing and efficient production. As Milton Friedman states in the case of natural monopolies, “there is only a choice among three evils: private unregulated monopoly, private monopoly regulated by the state, and government operation.” He said “the least of these evils is private unregulated monopoly where this is tolerable.” He reasons that the other alternatives are “exceedingly difficult to reverse,” and that the dynamics of the market should be allowed the opportunity to have an effect and are likely to do so. However, he does go onto state (and I agree with him) that if the commodity in question is an “essential” like power and water, and the monopoly power is “sizable”, then “either public regulation or ownership may be a lesser evil.”

Joe M May 15, 2011 at 6:45 pm

The only way a natural monopoly would be able to stay a monopoly is to offer the consumers the best product at the best price and that potential competitors could not compete on cost of production for the same product. The natural monopoly would know that if they tried to raise their price than a competitor could enter the market.
Alcoa Aluminum was a natural monopoly at one point in time. There were no competitiors that could match their product based on Alcoa’s cost and pricing.
We need the government to stay out of the business of providing energy for the public. With enough competition with competing forms of energy we would have lower costs and better service for all.

Natural Cleaning Guy August 29, 2011 at 2:32 pm

This article is very thought-provoking and interesting, yet the answer is very simple. Every citizen should have an equal part in conserving water, electricity, and the natural fibers of the earth. An economy should be formed by the residence of the country, not just by an official overseer. It takes the whole nation and community to put their part into it, by simply recycling, conserving, and protecting the natural environment.
For instance: I work for a Janitorial company in Delta…I love using natural, plant based cleaning solutions for my costumers. Chemicals and other harmful things that are being used in the popular brands these days, are being washed into the ground causing major eco problems, which in turn is costing more money. If the bottling companies knew that costumers would recycle their used plastic, would they be using up more chemicals to make more bottles? Or would they depend upon the conservation of all of us, to supply for the company, and to save the eco system? If we all take the time to recycle, conserve, and protect, we can all depend on each other for support. Anyone agree?

Here’s some more info on Naural Cleaning Substances for those of you who are interested! Have a beautiful day!

Samantha L. October 5, 2011 at 7:51 am

“The only way a natural monopoly would be able to stay a monopoly is to offer the consumers the best product at the best price and that potential competitors could not compete on cost of production for the same product. The natural monopoly would know that if they tried to raise their price than a competitor could enter the market.
Alcoa Aluminum was a natural monopoly at one point in time. There were no competitiors that could match their product based on Alcoa’s cost and pricing.
We need the government to stay out of the business of providing energy for the public. With enough competition with competing forms of energy we would have lower costs and better service for all.”- This is very much true.

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