According to neoclassical economics, “natural” barriers to entry in a market prevent new competitors from easily emerging in that market. Because of economies of scale, startup costs (fixed costs) are too high, and the larger firms have lower cost and huge advantage.
Anyway, it wouldn’t be a problem if there are so many substitutes. But, if industries can create economies of scale in an inelastic market like water supply, they become monopolies, then they can raise its price above marginal cost.
Are the prices doomed to rise, in that case ?
If you have any ideas, I would be grateful.
First of all: even if there is only one water supplier, that still doesn’t mean there is a really ‘bad’ monopoly, because if that system goes rogue, it won’t be that hard to go to the next city, or use water bottles, for water. If there is like one supplier of water in a city, it would make sense to make ‘strong’ contracts, so it doesn’t decide to ‘cheat’ on you (business do tend to do that sometimes, on a small scale, depending on the level of competition.)
Second of all; even if there is a ‘monopoly’; doesn’t mean he can charge any price. When the price of water goes up, people look to alternatives. (1) Catching rain water, (2) using a broom in stead of the hose to clean the drive way, (3) use bottled water, …
Thirdly. A friend of mine - who has zero care in politics, and is probably a little bit socialist, but has no idea about economics and all - went to Peru last year for a year to live with a family. ‘Water’ was supplied by competing firms by tankwagons, who you’d call, and they came within 24 hours to fill up you water tank (which were huge). There was no central mechanism of pipes under the ground; that was the way to get running water. Obviously; there were a few competing firms (I think she talked about like 4). Barriers to entry: not that high.
Forth of all: even if you are afraid of a monopoly; the ‘water supply mechanism’ could be owned by ‘the city’ (kind of like a gated community like thing) and the rights to manage it, could be sold on an annual base towards one competitor. That could be a way to solve the problem of the monopolist.
Thomas DiLorenzo addesses some of the issues with natural monoply. Often times a gvoernment just declared a natural monoply so the politicians could get kickbacks from whoever they sold the monopoly contract to. He cites some cities where government never took over the cable and power lines, there wasn’t always a monopoly provider.
Natural monopoly wasn’t a theory until government started doing it, and then the government economist lackeys came out of the woodwork to justify it ex post facto.
The neoclassical notion that price should equal marginal cost is based on the erroneous price theory of Alfred Marshall, which contended that only short-run prices are determined by utility, but long-run prices are determined by costs. As the Austrian school demonstrated ALL prices are determined by utility, in the short run AND the long run. The “marginal costs” standard is based on fallacy.
Another very common attempt to distinguish between a com petitive and a monopoly price rests on the alleged ideal of “mar ginal-cost pricing.” Failure to set prices equal to marginal cost is considered an example of “monopoly” behavior. There are several fatal errors in this analysis. In the first place, as we shall see further below, there can be no such thing as “pure competition,” that hypothetical state in which the demand curve for the output of a firm is infinitely elastic. Only in this never-never land does price equal marginal cost in equilibrium. Otherwise, marginal cost equals “marginal revenue” in the ERE, i.e., the revenue that a given increment of cost will yield to the firm. (Only if the demand curve were perfectly elastic would marginal revenue boil down to “average revenue,” or price.) There is now no way of distinguishing “competitive” from “monopolistic” sit uations, since marginal cost will in all cases tend to equal mar ginal revenue.
Secondly, this equality is only a tendency that results from com petition; it is not a preconditionof competition. It is a property of the equilibrium of the ERE that the market economy always tends toward, but never can reach. To uphold it as a “welfare ideal” for the real world, an ideal with which to gauge existing conditions, as so many economists have done, is to misconceive completely the nature of the market and of economics itself.
Thirdly, there is no reason why firms should ever deliberately balk at being guided by marginal-cost considerations. Their aim ing at maximum net revenue will see to that. But there is no one simple, determinate “marginal cost,” because, as we have seen above, there is no one identifiable “short-run” period, such as is assumed by current theory. The firm faces a gamut of variable periods of time for the investment and use of factors, and its pricing and output decisions depend on the future period of time which it is considering. Is it buying a new machine, or is it selling old output piled up in inventory? The marginal cost considerations will differ in the two cases.
AdrianHealey,
Wow ! That’s what I call an answer ! Thanks a lot !
Grayson Lilburne,
I’ve already read this text.
But I don’t like Rothbard’s works. He didn’t propose a way to solve the problem. No, he prefers playing on words, as usual.
AdrianHealey thought about self-governance. And it’s not a bad idea, imho.
I don’t know the story of all of these episodes. According to unmondelibre.org it seems there were some regulations (in Africa, however…) : prices, property rights, legal barriers to competition.
So… It’s a privatization, not a liberalization. But I’m not sure about that !
Can anyone explain these fiascos (Bolivia, Buenos Aires… )?
Well; the thing to remember is that ‘privatization’ is always and everywhere, by necessity, a governmental program.
Usually; privatization is a combination of strict regulation, handing over the state monopoly to a private monopoly, with the legal restrictions as barriers to entry kept in place, with licenses, etc.
Also; usually there is a reason that something get privatized, i.e. the government unable to handle it anymore. So there tends to be a bad record anyhow. Turning a state monopoly into a profit making enterprise requires so adjustment in price, quality and quantity. (Imaging the New York underground metro getting privatized; wouldn’t you expect - in the short - run some price changes and quantity adjustments, in order to cut costs for it to make profits and then, as time goes by, more and more services at lower cost?
Apparently, they used this as a criterium: “There is no commitment to universal access to clean and affordable water unless significant profit can be guaranteed.” Well, duh… So if they use thàt as a benchmark; of course water privatization will be big failure. They also accuse the industries from demanding government back guarantees; so that means there is a least something fishy going on with the legal structure in whic they work.
The Atlant Georiga case is obviously an example of selling a state controlled monopoly, i.e. franchising the monopoly. Manila, Philippenes seems like a company working under price controls (and, again, a state granted monopoly). Cochacba, Bolivia: state granted monopoly.
A more careful analysis can be provided by someone who looked more in to the situations.
Grayson Lilburne,
I’ve already read this text.
But I don’t like Rothbard’s works. He didn’t propose a way to solve the problem. No, he prefers playing on words, as usual.
Rothbard demonstrated that the “problem” is an illusion that manifests only due to faulty neoclassical reasoning. Your response is entirely empty. Spare me your summary judgments and dismissals. Grapple with the argument.