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Source link: http://archive.mises.org/4693/why-public-utility-monopolies-fail/

Why Public Utility Monopolies Fail

February 16, 2006 by

To prevent “burdensome competition” among utilities in a given area, writes Gennady Stolyarov, governments have often granted legal local monopolies to specific water, electricity, and natural gas companies — or provided the services themselves. Competing firms have been legally excluded from the utility market, with disastrous results, such as blackouts, deactivations, and prices that rise and rise. FULL ARTICLE

{ 37 comments }

georgist February 16, 2006 at 8:53 am

The article makes a good point about the head-in-the-sand “perfect” competition model. P=MC is precisely what you get from physically impossible assumptions. No one will ever plan to sell at marginal cost if there are any fixed costs they have to recoup. So claims like “efficiency maximizes when goods are sold at marginal cost” make no meaningful sense. If people only ever plan to sell at marginal cost, no efficiency gain resulting from (fixed) capital investments will occur. They could just as easily say “efficiency maximizes when goods are sold for free” — when you ignore the producer side, anything is possible.

Tom Lehman February 16, 2006 at 9:47 am

This is a very good piece employing arguments from Hayek’s “Use of Knowledge” article on the importance of pricing signals, so in that sense, the author is to be commended.

However, I would have liked the author to address the neoclassical argument regarding “natural monopoly” for local public utilities, say, city water and sewage services or local cable TV in suburban areas. It seems to me that this is where the article is lacking.

In the typical analysis, certain types of goods are excludable but non-rivalrous in consumption, and have high fixed costs with low variable costs (and thus low MC: MC less than ATC). Given the large economies of scale and large sunk costs that these characteristics imply, it is not clear that a totally free market would encourage (nor that we would even necessarily desire) multiple competing firms in these types of unique services.

Would it be the “best” use of resources for multiple competing water and sewage utilities to compete for the same consumers in my city by laying multiple plumbing and drainage infrastructure beneath city streets? Would consumers really be better off if multiple competing cable TV firms attempt to serve the same set of homes by stringing multiple competing coaxial cable lines through suburban neighborhoods? Wouldn’t this duplication of high fixed (sunk) costs draw resources out of alternative lines and make provision of the services less efficient, in spite of the competition?

Based on the arguments employed in this article, I am not convinced that the “natural monopoly” argument has been effectively addressed. However, I am certainly always open to persuasion away from neoclassical arguments and toward Austrian arguments, so I am really just fishing for a deeper analysis. It seems to me that privatization of urban areas combined with the proliferation of private neighborhood associations contracting with competing private utility service providers is a condition that could satisfy the neoclassical “natural monopoly” argument while also providing the pricing signals (through contract utilities services bids and fees to consumers) that would ensure a more efficient use of resources in the Austrian sense.

billwald February 16, 2006 at 10:19 am

Compare a telephone company with the cell phone situation. Cell phone companies can compete without causing additional inconvenience to the consumers. How mant times should the streets be dug up to lay competing cables?

gmlk February 16, 2006 at 11:26 am

Just a quick link:

In netparadox David Isenberg and David Weinberger explain how the best network (for the public and society as a whole) at the same time will be the worst network to make a profit from.

Keith February 16, 2006 at 11:34 am

“Would consumers really be better off if multiple competing cable TV firms attempt to serve the same set of homes by stringing multiple competing coaxial cable lines through suburban neighborhoods?”

Bad example. I have my own experience where I lived near the edge of a city that had a cable monopoly and the next city over had another cable monopoly that charged less. Why should the cheaper cable company be prohibited from competing into the next city? At first only the people at the edges would get the benefit of the competition, but eventually all would. Why can’t the same thing apply to water or sewer or electricity systems.

As for how many pipes are in the ground or how many wires are overhead, who cares as long as people are getting the services they’re paying for and the companies providing the services are profitable. When it becomes too expensive to run new pipes and wires, you’ll end up with a monopoly anyway (at least until the monopoly begins charging too much and then you’ll get competition again).

Anthony G February 16, 2006 at 11:35 am

Have we overlooked the possibility that the reason why monopolies were granted to utility companies was to prevent competing utility companies from laying their own gas pipes, electric lines, or water lines side by side?

It would be absurd to have one gas company, let’s say GasCon, excavate and law down pipes, then have another company, NewGas, excavate and lay down pipes right next to GasCon’s. With a monopoly, there is much greater infrastructure efficiency, since one pipe can handle all the gas demand for the particular. There are drawbacks with monopolies, namely poor management efficiency due to lack of competition, but the waste that would occur if competing gas companies occupied the same area would be breathtaking.

Having three companies competing for the same geographic area would lead to this outcome unless I am overlooking something.

Brian Drum February 16, 2006 at 11:36 am

Prof. DiLorenzo has a nice article on this very topic:
The The Myth of Natural Monopoly

Brian Drum February 16, 2006 at 11:47 am

It would be absurd to have one gas company, let’s say GasCon, excavate and law down pipes, then have another company, NewGas, excavate and lay down pipes right next to GasCon’s.

Why is this “absurd”? Is it also absurd to have two gas stations next to each other when one could easily “handle all the gas demand”? Or what about two grocery stores on the same block?

As for digging up streets to lay a second set of pipes, this is only an issue under road socialism. With state road ownership there is no way to come to an ecomically rational price for digging up the road. “Excessive” digging on roads can only occur when the price of access has been set below its market price, and w/o private ownership there is no way to determine what that price is. Same goes for excessive use of the roads, i.e traffic congestion, etc.

Tom Lehman February 16, 2006 at 12:10 pm

Good follow-up comments. I fear that some of you, however, are ignoring the specific unique attributes of the types of goods generally provided through public utilities on which the “natural monopoly” argument rests: excludable but non-rivalrous, with a high fixed-cost-to-variable-cost ratio leading to large scale economies.

A gas station or a grocery store sells products that are excludable and rival, and does not operate with such high fixed costs relative to variable, meaning economies of scale are smaller, sunk costs are less prohibitive of entry, and the good is entirely private. The problem of “natural monopoly” goods is that markets are not likely to create a great deal of competition on their own, so limited (inefficient?) monopolies are likely in some geographic areas, mainly urban areas, but also potentially rural. And, contrary to one post’s suggestion, these monopolies are not easily unseated by new entrants when they restrict output and elevate prices above “competitive” levels due to high sunk costs acting as a potential barrier to entry.

And, I would hope that no one here is truly arguing that we should privatize streets and charge tolls on every street corner just to avoid urban “road socialism” as Mr. Drum puts it. As much as I favor full-blown market-based tolls on privatized highways and interstates, privatizing city streets (and sidewalks too?) and trying to exact tolls on them would impose large transaction costs. If you think congestion is bad in urban areas now, try privatizing streets and making the good excludable.

In these cases, I believe the best Austrian approach is to think of urban economies as a single “urban firm” contracting with outside private providers of utilities, offering the best package of utilities services, fees, and property tax assessments in order to attract the “optimum” number of business firms and residents (a variation on Tiebout Choice theory).

David J. Heinrich February 16, 2006 at 12:25 pm

Tom,

It is absurd to think that private road owners of frequent-stop roads would use the business model of tolls. Alternatives would be availble, such as licenses to drive on that road and digital (electonic) signatures.

The argument that we should have a monopoly anywhere where there are “very” high fixed- to variable-costs is silly. First of all, who defines what’s “very high” fixed:variable costs? It is completely arbitrary. Secondly, just because fixed costs are high does not mean there cannot be viable free-market competition. There as DiLorenzo has detailed, there have been private railroads, private roads, and private utility companies, all of which were highly competitive and viable. If fixed costs are high, and that deters some from entering a market, fine. That means they felt their resources could better be used elsewhere, and in general the overall market benefits from the resources being used elsewhere.

Brian Drum February 16, 2006 at 12:55 pm

As for modern urban road environments I would venture to say that they are for the most part products of coercive central planning. Almost all roads are paid for via taxation and provided as “free” public goods. I wonder what urban infrastructure would look like in cities that evolved in a free society….

Harry Valentine February 16, 2006 at 1:47 pm

Gennady’s article indicates that there are faculty members at Hillsdale who are teaching sensible free market economics. Unfortunately they’re so few and far between.

Excellent article Gennady.

georgist February 16, 2006 at 1:52 pm

Tom_Lehman: Privatized city streets does not mean toll city streets. Many neighborhood and business district streets are privately owned and operated but do not extract tolls — they collect the money other ways, such as HOA fees or renting out plots for businesses. Tolls are only one way of many of running a private road. That doesn’t necessarily mean those options are a good idea, but I needed to point out that the deeply-ingrained, widely-held belief that “private road = toll road” is false.

Christopher Meisenzahl February 16, 2006 at 1:52 pm

I agree with all of the original article. But a question still nags me.

When I talk about this with others they often respond that we must have these “natural monopolies” because of the problem of laying redundant pipe, cables, wire, etc. to every house.

What is the appropriate response to that? I haven’t thought it all the way through yet.

Thanks in advance,

Chris
http://amateureconblog.blogspot.com/

Tom Lehman February 16, 2006 at 2:30 pm

Mr. Heinrich states: “It is absurd to think that private road owners of frequent-stop roads would use the business model of tolls. Alternatives would be availble, such as licenses to drive on that road and digital (electonic) signatures.”

I do not deny this. My argument is simply that the transaction costs of adopting even these types of technologies would be high enough to make people worse off as a result. This stems from the basic fact that city streets cannot realistically be made excludable without erecting some type of barrier that would significantly reduce traffic flow and create congestion unless it were done at the private city perimeter (a.k.a., downtown London tolls).

Mr. Heinrich states: “The argument that we should have a monopoly anywhere where there are “very” high fixed- to variable-costs is silly.”

I am not arguing that we “should” have a monopoly. Read carefully. I am saying that this will be the general outcome that we can expect given the type of goods being provisioned, whether that be publicly or privately. And, I am aware of and respect highly DiLorenzo’s research on the issue of the origins of “natural monopoly” arguments. Yet, the examples he gives of privately provisioned utilities and roads are 1) still monopolies, just not public licensed monopolies, and 2) were historical exceptions to the general rule in any case. With roads, the issue always was excludability and the “free rider” problem that left them underprovided and overused. This is a fact of history.

Mr. Heinrich states: “If fixed costs are high, and that deters some from entering a market, fine. That means they felt their resources could better be used elsewhere, and in general the overall market benefits from the resources being used elsewhere”

Agreed. Could not say it better myself. I am only arguing that in the case of these types of goods, some monopoly is likely to arise, either privately or publicly. And, with local water, sewage, electric and cable TV utilities, and city streets and sidwalks, the more we can privatize, the better, but I am not staying awake at night worrying about the fact that the local government has become involved in “planning” the provision of some of these public goods. City/county government provisioning of some services at the local level is not the end of the world in my view.

Brian Drum February 16, 2006 at 2:48 pm

County government planning: Of course there is always that pesky little problem of having your house seized and auctioned off if you decide that you don’t want to subsidize a road 40 miles from your house that you will never drive on and never see, all for someone you’ve never met and most likely never will.

David J. Heinrich February 16, 2006 at 3:13 pm

Mr. Lehman,

1. I do not think that the costs of enforcing private road ownership would be high. For one thing, it isn’t necessary to physically exclude various drivers via preventive measures. All one need do is have a high enough penalty for driving on a road without paying for the priviledge to drive on that road, so as to discourage such. One could easily imagine various road owners agreeing on some kind of standard electronic signal that cars would have to have to (not be pulled over on their roads), which would register with various guideposts, telling some kind of computer system how much time a peson spent on a particular road, thus how much to charge. Or maybe that’s not a good system, so instead advance licenses could be paid for.

2. It seems like you’re using the neoclassical (flawed) understanding of “monopoly” as “few firms” or “only one firm” that provide a particular service. The “natural monopoly” argument made by neoclassicals — which is really quite silly — goes something like: “as a natural matter, there will only be one firm providing this service, therefore competition in the provision of this service should be banned, and the provision of it regulated by a State”. However, a proper understanding of monopoly is that monopoly exists whenever competition is banned by the State (coercive force), not whenever other firms can’t compete because there already exists a highly efficient firm, or when entry into a market is difficult due to high fixed costs.

Also, I object to calling the owner of a private road a “monopolist”. I don’t understand this argument, except if you mean by it the fact that he himself is the exclusive owner of the road, just as Roger Federer is the exclusive owner (“monopolist”) of his tennis appearances.

Regarding roads being “underprovided” and “overused”, it seems to me that we cannot make this kind of assessment absent a free market. It is arbitrary to say that something is “underprovided” or “overused” on the free market in which there are property rights. If not many roads are built, obviously people feel their resources are better elsewhere used.

I’d also note that there’s no fundamental reason why the free market can’t engineer around the need for roads in many cases, via technological innovations (modes of transportation that are more durable — more able to ride rough terrain).

3. Well, the argument against public roads — and the argument that the free market can provide private roads — is only part of a larger argument for the free market. To say it’s no big deal if the government provides some services at the local level seems to me to miss the point: this necessitates that a State exist in the first place, and thus we have problems much larger than road socialism, like democide*.

* Although Walter Block would argue — and I am in agreement with this argument — that we can blame the State as liable for all of the death’s that occur on public roads, as it has banned competition in that area.

Plowman February 16, 2006 at 4:07 pm

I realize this may be an unusual example, but the Stanford University campus is entirely private. They have roads, police, utilities, open spaces, etc. The roads are clean and toll-free (even for visitors), the utilities (power, phone, and electricity) are all provided at reasonable rates and are highly reliable. The police are friendly, and don’t meddle in your business unless they have good reason to believe you are doing something wrong. You could say that all of these provisions are monopolistic, since they are provided by a single provider in all cases, and yet Stanford demonstrates none of the problems that public utilities companies do. Why? Because Stanford must compete on the market (ignore federal subsidies for the moment!) to attract new students, teachers, laborers, and to continue to be provided with an endowment from their alumni. This means that they must control the costs and quality of all the services they provide to their community. It’s an interesting, if imperfect example.

I’ve also been to gated communities and business parks that are clean, well-maintained, and provide a full complement of utilities services.

tz February 16, 2006 at 4:17 pm

You could not have private roads (It was an example I did in my blog).

Consider four of the property owners along a critical section (it doesn’t make sense to have a serpentine road that has to wind three miles to go forward by one). One is a decompensating psychotic that is convinced, but the voices in his head are saying “no”. A second is a sadistic misantrope and realizes how everyone will benefit and enjoy the road, and he can cause pain simply by saying “no”. The third just buried “fluffy” in the back yard and can’t bear the thought of touching the grave. The fourth just likes to watch ESPN all day, doesn’t care about economics, your offer and just doesn’t want to talk to you no matter what the offer. All these would have perfect property rights, and even if you could convince 496 of 500 other owners, these would hold out and you cannot convince them economically. So what do you do?

If government forces the sale, then the property is stolen. There will NEVER be good title to the property. For if government were to redress the theft, they would have to give the property back to the original owner with full rights. The alternative is Kelo which is a greater evil. The annoying conclusion is the government must hold the (tainted) title to the property of the road. They can contract construction, maintainence, but they cannot sell or give away what they don’t properly own (they can only return it to the theft victims).

Roads are generally needed where everyone already own the property, so you can build a long and straight black-top, just not where anyone is.

Utilities have a similar problem. I don’t see the rural cooperatives – which are closer to voluntary organizations (the third dimension, more like Linux or opensource developers). There is the third possibility, and that might be the most appropriate for such monopolies.

The State and The (private) Corporation are not the only alternatives, though I think it would require state power to get the right-of-ways.

Private utilities are bad just as the church of England was bad when it was linked with the state (state powers used in promotion of the church, and church authority used in promotion of the state). But that need not be the case, but it would require a separation of public corp and state.

I’ve noted that a lot of corporations tend to like the state, so would probably build one if given the chance to exploit economic coercion. Corporatist Libertarians might not be different from Regime Libertarians.

Tom Lehman February 16, 2006 at 4:42 pm

Mr. Heinrich: on point number one, we just fundamnetally disagree. The transaction costs would simply be too high relative to local government provision of city streets and sidewalks. Excludability will always be a problem in closely connected and highly populated city streets. The only way to address the problem without public provision of the good is through a private community with monopoly (single provider) provision of the service, an outcome I alluded to in an earlier post.

Your point #2 is heavily loaded with normative statements about the “proper” understanding of monopoly and the neoclassical position, and you are clearly showing your Rothbardian anarcho-capitalist stripes (whether that is good or bad is up to the reader to decide). As to whether something is underprovided or overconsumed, you are exactly right that we need private property rights and a free market with accurate pricing signals to tell us this. But, whenever that institutional framework is difficult or impossible to achieve (such as I am arguing with public goods like city streets and sidewalks), then we know, even if we cannot measure the degree to which it exists, that resources will be misallocated relative to the market outcome. Historically, private roads were overutilized and underprovided, and travelers and shippers sought out other alternatives, namely water-based routes or railroads. My point is that when a service (such as road use) is non-excludable, you will have an increase in use and a disincentive for production in the private sector (what honest economists, Austrian or neoclassical, call “market failure”)leading to underprovision and overconsumption relative to the ideal market outcome, regardless whether or not we can actually pinpoint or measure where this “ideal” would be.

On point #3, you are arguing from an anarcho-capitalist normative perspective regarding the state, not a purely economic or cost-benefit argument, so our common ground no longer exists.

Finally, the previous post regarding the example of Standford University is a good analogy for how the neoclassical position on natural monopoly and the Austrian argument for private property and pricing signals can be resolved and integrated, in my view, and was really what I was getting at in my initial post regarding the article in question.

David J. Heinrich February 16, 2006 at 5:05 pm

Mr. Lehman,

1. It isn’t some law of nature that it’s too expensive for private road owners to exclude those they don’t want on their roads. Furthermore, as a profit-generating venture, how to do such is up to them. Given modern technology, it is simply infeasible to say that it’s too expensive to exclude (or rather, retroactively punish/fine) those who aren’t licensed road users. Even assuming the Middle-Ages, given an adequately sufficient penalty, it still isn’t too expensive (you need only occasional policing of the roads, such that there is a very real possibility of being caught and paying an enormous fine).

2. Since anyone making an argument at all is already implicitly assuming the NAA (see argumentation ethics), I have no problems including those normative statements. However, even absent the libertarian dimension, mainstream economists are simply wrong (as in incorrect) to say that you need to have many firms to have competition, and that a situation with few or one firms (what they call “monopoly”) mean no competition.

3. Well, it seems to me that there is a fundamental distinction: you can either argue that it is acceptable to have States, or that it isn’t. If you’re going to argue that we shouldn’t abolish States, you have to accept some of the natural consequences of the existence States, which include democide, total war, communism, and fascism.

Economic law tells us that these aren’t merely accidental things. It isn’t an accident that there was a holocaust, or that GWB is going to war left and right. It is a praxeological law that one is more inclined to intiate aggression (ceteris paribus) when one’s aggression is subsidized by the taxpayers who are stolen from, because: (1) This person puts up no funding of the aggression. GWB is not paying one dime for the funding for our war in Iraq. (2) This person does not in any significant way bear the costs of the war: GWB isn’t the one fighting and dying.

Although this may sound extreme, it isn’t a condemnation of less radical supportes of the free market, or of minarchists. I will applaud anyone on any issue on which they support the free market / private property rights and oppose the State.

However, if you’re going to have a talk about the fundamental matter, you can’t have your cake and eat it too. Now, I’m aware that some think that the anarcho-capitalist position is impossible; that, absent States, we’d have Hobbesbian anarchy, chaos, disorder, etc. I don’t agree with this view, due to praxeological considerations as well as the very nature of man as a social being. However, granting that it’s true: I would pit the worst sort of world-wide Hobbesian anarchy on a world-wide scale against this last century of Statism, and say that the number of people murdered, tortured, assaulted, or otherwise abused would have been far less (by orders of magnitude) over the past century, than the death, torture, assault, etc that this past century under Statism.

David J. Heinrich February 16, 2006 at 5:11 pm

tz,

Regarding your argument for why private road owners would face problems, this is simply the hold-out argument. It is wrong for numerous reasons. For one, there are many alternative routes. For another, at the very least, individuals have economic incentives to allow roads to be built along their property, as it would be convenient for them.

Of course, private road builders can always buy options to purchase the land, and do such along several possible paths for their roads. Private road builders can also tunnel under — or bridge over — land owned by others, because you only own what you homestead (or what you purchase that was previously homesteaded), and not a cone of the Earth going to the center of the Earth, and extending out into the heavens. They can also wait for these holdouts to die or move, as a longer-term option.

Given the possibility of private community covenants for the purpose of enhancing private life as well as private property values, the road problem becomes very easy to solve simply by the possibility of such covenants in the first place.

Angelo February 16, 2006 at 6:03 pm

Good article. I’m glad to see one of my heroes, Hayek, get some credit.

Paul Edwards February 16, 2006 at 6:25 pm

This article was good, however, I will criticize the aspects that put emphasis on personal knowledge, skill and expertise, and that de-emphasize the importance of the arbitrage that occurs across industries and stages of production in the entrepreneur’s quest to maximize profits and minimize loss.

The article states,

“No single individual possesses all the facts, and different individuals have different realms of skill and expertise. There are discrepancies in information. Applied to the utility market, this means that some individuals who are excluded from it by government force know valuable data that the monopoly managers do not. They might know about more economical techniques of obtaining electricity or processing water; they might have technical knowledge enabling them to design better electric grids or piping systems. They might even have tacit or inarticulable knowledge that helps them run a business on a day-to-day basis — knowledge that is difficult or impossible to put into words and communicate to another.”

But state monopolies do not prevent knowledgeable persons from gravitating towards and entering their fields of interest. Instead, they prevent profit seeking speculators from entering and leaving lines of production and stages of production. They eliminate entrepreneurship from quickly redirecting capital resources from less optimal uses to more optimal uses according to the consumer’s preferences as expressed through the price structure.

The article states,

“In Hayek’s view, the price structure of the free market is a potent tool for remedying the problem of imperfect knowledge and economizing on knowledge. Prices give consumers all the information they need to properly adjust their economic decisions — even though most consumers will never know the full details of the market disturbance that made the economic adjustment necessary in the first place.”

But more importantly, it is the entrepreneur who uses prices, specifically, the price spreads between factor costs and selling prices – his profit and loss sheet – to determine what lines and stages of production to remain in, expand in and leave. The process is a continuous cycle of speculation, investment and monitoring the profits resulting from this speculative activity. State monopolies hamper this.

The example given that

“…a natural gas pipeline might unexpectedly burst in Canada — unbeknownst to almost everybody in the United States. The decrease in the supply of natural gas will imply higher prices to be paid by local private gas providers. Most providers and consumers of natural gas will have never heard of the original mishap, but the new higher prices on natural gas inform them of the need to economize on it. Economic actors will now purchase less gas than they would have under the lower price.”

is correct, but neglects to show how it is the consumers who, through the structure of prices, will direct profit seeking entrepreneurs towards producing more gas again. In an inelastic gas market, consumers will withdraw resources from other markets and direct them towards buying gas. This will increase gas profits, and draw entrepreneurs into this market and away from others. In this way, reduced supplies which result in increased profits will induce increased entry to this market and therefore increased supplies and finally, a lowering of prices will tend to result.

Because of profits, losses and the arbitrage implied in entrepreneurship in a free market, the free market is always tending towards a consistent rate of return on investment – interest – across all lines and stages of production.

With a state monopoly, the distortion results not from the inability to attract or use knowledge, but in an inability for profit seeking entrepreneurs from entering and equally important, from leaving the market on the basis of profits and losses (consumer demand) alone.

The Economist February 16, 2006 at 9:04 pm

On roads, it is necessary to dinstinguish between accessways and throughways. Accessways bring you access to a specific destination, and it is therefore in the direct interest of the owner of this destination to pay to facilitate your access to it. Cities are networks of accessways, as are most rural roads. They will always be toll-free and paid for by the property owners who want their property to be accessible from the road. This is also true of the internet. You pay an internet service provider to connect you to the global network. Anyone can then communicate to your computer for free.

Throughways carry traffic over longer distances at greater speeds. They are accessible from accessways at specific points, and are a specialized good (faster transit). The interstate highway system is a network of throughways. The internet backbones are also such a network, though the traffic is paid for by the accessway providers instead of the users.

It’s true that connecting property to more than one road at a time is materially ridiculous, but that does not make the providers uncompetitive. Competition happens from one “city” to another. If the city’s streets are run poorly and the price is too high then people will gradually move to a competing city (this is why there was an escape to the suburbs in North America). A privately-owned city would be interested to maintain competitive pricing even if it was poorly run, while a publicly-owned city just raises taxes and runs it faster into the ground.

Gene February 16, 2006 at 9:49 pm

I read with pleasure the Lehman-Heinrich debate. I will not be able to duplicate the eloquence of their arguments. Being and engineer for a local gas LDC I would like to offer what really happens in the world of regulation (at least in my area). Up until a few years ago we competed vigorously with another local gas LDC. We started to gain some of the upper hand. The other company went to the state to regulate both of us because of the “waste” of competition (heaven forbid some pipe was duplicated). Unfortunately, they are much better at the political game then we are. The ultimate result, I think, will be monoply areas created for both of us and probably much higher prices for both customers. But the PUC will keep prices in check – Ha Ha!

Paul Edwards February 16, 2006 at 10:41 pm

Gene,

Yours is a great instance of theory and practice so clearly lining up. It’s always the politically favored of the regulated that ends up pulling the strings of the regulation to their own advantage. People are such dupes thinking some honest, altruistic and clear headed state bureaucrat keeps things on the up and up. What a con. Great anecdote!

Frank Paine February 17, 2006 at 11:17 am

I thought this article did a great job of demolishing the argument that utilities should be legal monopolies.

However, I can already hear the political classes’ response–we’ve de-regulated it. Nuts! What that means in reality is that there is a class of licensed intermediaries to whom the utilities MUST sell, and who may sell on to consumers at a discount to the producer price, but still in excess of the producer’s price to the intermediary. The profit resulting goes into the pockets of the intermediary, and the producer at best gets some marginal value from increased econmies of scale.

What’s wrong with this picture? First, of course, the intermediary’s position is legally mandated and subsidized to the degree that the producer MUST sell to it. In the absence of that subsidy, the intermediary in all likelihood would not have a viable business. In addition, the profits don’t flow to the producer…

Now here’s something else that frequently gets overlooked–profits, in financial terms, are not just a return to capital..the price for the rental of the equity, if you will…that in theory are proportional to the risks assumed. They are also the principal source of capital for the ongoing maintenance and growth of the business. To the extent that the profits are not flowing to the producer, the producer is less able to maintain, improve, and expand its capital infrastructure. And this is a particularly capital intensive business we are talking about.

No wonder, then, that the utility infrastructure is crumbling. That’s why I bought a generator for my house a couple of years ago…Ciao!

tz February 17, 2006 at 12:08 pm

This is the first time I’ve heard a denial of the laws of geometry by a libertarian to defend principle.

David J. Heinrich wrote:

For one, there are many alternative routes. For another, at the very least, individuals have economic incentives to allow roads to be built along their property, as it would be convenient for them.

I’m not sure about the world you live in, but in the one I’m in at the moment, the shortest path is either a euclidian straight line, or a great circle route. There can be many “alternate routes”, just as you can go from LA to NY via Bombay. They will not be the most efficient. So the “market” in this case will produce a less than optimal, efficient outcome.

By extension, some optimal geometric paths might involve expensive construction, so you might want to route around a lake anyway, but holdouts might force the construction to take the more expensive path. And based on the Train-Sparks v.s. Burnt Crops principle, the holdouts have a right not to have rumbling below or obstructions above since that came with their property. Otherwise roads become automobile subways. This might potentially be better, but would be a lot more expensive.

As to the second point on economic incentive, I gave four examples of irrational or malicious vetos. It doesn’t matter if the economic incentives are infinite if people don’t respond to economic incentives.

I.e. it isn’t an economic hold-out, but some form of evil or irrationality – the psychotic who is detached from reality so can’t tell profit from loss, the malefactor who desires to interfere and cause problems for their own sake – the person whose rationality is subject to emotion – and the satisfied, ignorant apathetic who doesn’t care to think.

Liberty ought to tolerate a great deal of evil and irrationality (mainly because in this world we do not always know what is truly evil or irrational), but they ought not be given a veto over everything. If liberty treats the civilized and the barbarian equally it will not last long.

Let me propose a fifth example to reinforce the point – a cloistered monestary along the geometrically optimally efficient path where the occupants are under a vow of poverty so literally have no economic incentive. Being cloistered, they have no use for a footpath, much less a superhighway. You might be able to reason they could benefit others, but that would be an argument from socialism or altruism. The monestary might have been there since before the american revolution and isn’t going to move short of the parousia or violence.

As a pro-lifer, I’m really annoyed that they seem to consider the problem of abortion as one of the holdouts. A 47 million victim, 33 year holocaust, and all they can do is say wait for enough of the justices to die or retire. My main annoyance is they don’t seem to advocate the policy with Iran, Saddam, Osama, or the Taliban – they don’t mind preemptive violence with “collateral damage” in these cases. Nor do most libertarians propose waiting for the thief to die and then using their estate to compensate for the theft. They want to redress injustice more immediately.

Time is money. You can’t just wait for holdouts.

Ryan Fuller February 17, 2006 at 12:21 pm

“Liberty ought to tolerate a great deal of evil and irrationality (mainly because in this world we do not always know what is truly evil or irrational), but they ought not be given a veto over everything. If liberty treats the civilized and the barbarian equally it will not last long.”

Oh, that’s some fabulous reasoning right there. We don’t know what evil or irrationality is, but somehow we’re supposed to know who is a barbarian then deny them liberty? Give me a break.

Curt Howland February 17, 2006 at 12:31 pm

tz, the problem with prohibition of abortion is that it is a prohibition. Prohibition doesn’t work, as every prohibition has demonstrated its failure over time. You’ve been frequenting these forums long enough to understand why alcohol prohibition failed, why drug prohibition is failing, why prohibition always generates more abuses in its attempted enforcement than the “problem” that prohibition was supposedly going to solve.

“Free To Choose” is not set aside merely for convenience. In order to ensure your own liberty, you must allow others the same liberty even to do that which is repulsive to you. No matter how strongly you feel about abortion(pro or con), there is someone else who feels just as strongly about censorship (pro and con), tariffs, unions, speed limits, dress codes, smoking tobacco or anything else, drinking alcohol or anything else, taking heroin or anything else, eating meat or anything else, etc etc etc etc.

The road to serfdom does not begin with little things. It begins with big things that “most people” may agree on.

David J. Heinrich February 17, 2006 at 12:37 pm

tz,

Your statements are absurd. I’m not denyhing the laws of geometry. You’re simply constructing a strawman.

Your talk of “geometrically optimal routes” is meaningless. You fall into the neoclassical trap of thinking that interpersonal utility comparisons are possible. If someone doesn’t want a road built along their property — for whatever reason, it really does not matter, because it is their property rightfully — than that’s their right. Maybe they don’t want the road built along their property because they don’t like the name of the person who’s building it, or because it’s a Tuesday, or maybe they’re just a nasty person, or whatever. So what.

Regarding the holdout’s rights above and below, their rights extend only so-far as they’ve homesteaded property. You can’t build so near beneath them that it would collapse their property, and bridging above them would have to be done in such a way that it didn’t (for example) interfere with their growing of crops. Walter Block has discussed this in his works on private roads. Regarding rumbling below, it is debateable to what extent such is allowable, but there is only an argument against it if it is to such an effect as it interferes with their use of their own private property. And regarding any unseemlyness of a bridge above, you have no right to the “view” of your property — only what you’ve homesteaded.

I have to love the hypocrisy from someone so concerned about “freedom” in software, that you think you have the right to run other people’s lives and violate their private property rights, because you deem a certain road construction to be “more efficient”. It would be very efficient from the road-builder’s point of view if everyone just gave them the land they needed to build land on. So what? It certainly wouldn’t be efficient for those who’s land it is. And it certainly isn’t libertarian to support such emminent domain — it is despotism.

Your analogies are particularly misplaced. A hold-out — for whatever reason, nastyness, delusion, a vow of poverty, etc — is not in any way analagous to a thief. He is merely exercising his natural rights over his property. If you build a road over his property anyways, using some bs emminent domain excuse, you are the thief and the crook.

I could make a strong argument that the only one here who’s psychotic is yourself. What else do you call someone who has no respect for another’s private property, and is willing to violate it, merely so that some “optimical path” of construction might be satisfied? This is the psychosis of engineers and technicians, that they think the entire world should be mallable to their dreams of optimal design.

George Gaskell February 17, 2006 at 1:54 pm

I have never heard someone compare a Supreme Court justice with a property owner who simply refuses to allow some government-sponsored construction project to go across his land.

The Supreme Court justice is an agent of the government, mind you, who resembles a garden-variety dictator the more that he decides to invent new legal theories on his own. He decrees what everyone shall do and not do (with greater and greater scope of authority as time goes on, apparently). A property owner commands no one, but merely expects others to refrain from interfering with his property. If these two men are the same, then language has no meaning.

The idea that you can use the same word — “holdout” — to describe both people is quite astonishing. Deeply confused and misguided, really.

This is the psychosis of engineers and technicians, that they think the entire world should be mallable to their dreams of optimal design.

Excellent point, Mr. Heinrich. But there is one profession that puts engineers to shame when it comes to megolomaniacal psychosis — urban planners.

sag February 17, 2006 at 2:33 pm

David,

I am with you on this meddling minded insanity. Looking at these and other posts, it occurs to me that excuses for intervention come when people try to get around the fact of scarcity. The assumption seems to be that abundance is the natural state of things and the government’s function is simply to restore the natural abundance prior to market distortion. It’s as if one were shooting the (market) messenger.

This seems to be why you constantly hear all sorts of lurid and paranoid hypotheses about possible outlier cases if the market were allowed to work unhampered. The real question they seem to be asking is “where’s the powerful force that’s somehow going to make all problems disappear in your model?”. Hence all state worship. No matter what various actual states have done and continue to do, they at least claim in principle to have the solution to everything. It’s merely then a matter of implementation or reform etc. None of the statists ever seem to invent various lurid hypotheses for state power run amok. Or even to consider actual examples! Other than the usual “couple of rotten apples” attitude…

George Gaskell February 17, 2006 at 2:47 pm

None of the statists ever seem to invent various lurid hypotheses for state power run amok.

Sure they do. They just attribute all such amok-running to the Opposition Party, whoever that may be, thinking that they themselves are somehow immune.

And when a sympatico government official does something undeniably horrible, then they claim that he only went wrong because he abandoned the True Form of the preferred governmental system (e.g., “Stalin didn’t represent true Communism.”).

TheOneLaw April 10, 2009 at 2:23 am

What baffles me beyond description is the fact that virtually everyone who even considers these problems does not recognize the “communism-disguised-as-capitalism” of the so-called ‘public utilities’.

Is there no one else on the planet who does not recognize the fundamental flaws inherent in being
“on the grid” ?

If you want power, get your own genset.
If you want water, recycle.
If you cannot manage your own sewage,
move to ——- or some other cesspit.
If you want communications get wireless.

Anything less makes you a slave to your own needs.

Anything that requires a physical installation on
what the statists refer to as public property is
merely a road to corporate serfdom.

Utility Consultants November 9, 2009 at 7:01 pm

Economics in any field is at best – disorganized. Competition may be inconvenient, but at its core, will better suit customers and shareholders – and will ensure better and more consistent delivery.

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