![]() Natural monopoly theory breaks down because it treats the world as fixed, unchanging, and mechanical. Hence the regulation based on it is just extra baggage burdening the economy. ![]() The public policy response to this idea has been to establish monopolies by law, since they are inevitable anyway, and then regulate them “in the public interest.” But natural monopoly theory is wrong. Competition sooner or later will drive out all but one firm, leaving the consumer at its mercy. This means, according to the natural monopoly theory, that it is uneconomical for more than one firm to operate in a given market. For more electricity, just turn up the generators a little. At the same time, the marginal cost-the additional cost of producing one more unit-is very low. That is, fixed costs for machinery and equipment are very high-such as the cost of an electrical generating plant. The theory holds that a natural monopoly will develop when, in a given market, there are great economies of scale. It is based on the theory that utilities are “natural monopolies”-the sorts of industries in which monopolies naturally develop. The first reason I offer for total deregulation is that utility regulation is unnecessary. Government should stop guaranteeing rates of return to the utilities, with no regard as to whether the companies are efficient or serve their customers well. Utilities and their customers should be allowed to determine prices by voluntary agreement. ![]() Presently, the rates or prices charged by most utilities are set by the political process, via public utility commissions. Let established firms try to expand into one another’s territory let new companies try to develop in any area.Īt the same time, government should deregulate the pricing of utility goods and services. Government should repeal the privileges it has conferred on various gas and electric companies, cable television companies, water companies, and so on. In particular, government should remove all its monopoly privileges and allow anyone to try to compete with existing utilities, in any market or location. Utilities should be completely deregulated. It is unnecessary, inefficient, and in the final analysis, immoral. I contend that such government intervention is wrong. Government regulates utilities by granting them monopoly privileges, and then controlling their prices. This article is adapted from a speech he gave earlier this year at Marymount College, Tarrytown, New York, as part of a debate on utility regulation. Howard Baetjer is a member of the staff at FEE.
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