I have never really heard any convincing arguments on why roads and railroads should be privatized. As the competition would be very limited because of the high establishment cost. This would lead to natural monoplies, and in a free market, I guess it would be possible for a railroad and íts “competetitor” at a specific distance, a road, to fix prices, which would result in the owners of the railroads and the road earning lots of money at the expense of the consumers. The consumers often dont have a choice, but have to pay to use the road/railroad, because of their obligations (work e.g.).
So while government as always would produce and set prices ineffective, the costs for the consumers would be probably still be lower than what it would have been if it was entirely privatized. Any objection to my way of thinking?
At least they couldn’t use the roads as leverage against their customers and make them support other programs, which is exactly what the government does. (“If you don’t vote for this spending package, we may not get our research subsidies, but you won’t get your potholes fixed”). I’d be much happier with a private monopoly than a government monopoly on the roads.
They can’t raise the costs above the cost it takes others to produce and maintain a road (however high that may be), meaning there is still an upper bound on what they can charge, though they can indeed make a profit off of their road (which is the point of investing in one in the first place).
When they do charge more, people will find ways around it. They’ll either walk more, carpool more, take mass transit more, or won’t go out as much. Either way, it means less customers for the road business. They have every incentive to charge a price customers are willing to pay.
If I’m an employer, and I forsee trouble with workers or customers being able to traverse to my store, I’m more than likely to cut a deal with the surrounding road owners. Road owners aren’t likely to refuse money and customers just to be dicks.
Do you have any evidence for this? The government can’t even calculate demand for roads.
Well are we talking ethical or economic arguments?
Economics is essentially value-free (although generally humans have a built in utilitarianism which tends to combine with economics to make value judgements possible). However, it does seem clear that economics points to privatisation, even in the case of so-called “natural monopolies” (it takes a misunderstanding of what a monopoly is to judge that a monopoly is even a coherent concept in the free market).
Ethically the case is completely clear. If I own a thin strip of land from London to Manchester and decide to tar it, it is my choice, and only my choice, who may use my land for transit. Thus, I may request whatever I want as payment if individuals wish to use my land.
First of all, that’s a normative conclusion, not a positive one. Secondly, have you read the literature on the subject? Walter Block just a released a book on this, he has many articles on the subject already released and other important Austrians have written much on the subject including Armentano and DiLorenzo, now, I’m not curious have you read this work?
Why do high start up costs preclude the possibility of competition? Moreover, how does one get from this to the conclusion that the state should manage the roads? It seems like you’re throwing the baby out with the bathwater.
I don’t think you understand the nation of competition, it is far more dynamic than you seem to comprehend.
Funny. I’ve never heard any convincing arguments why they ought to be socialised…
BTW, firms are subjected to competition at all levels. Normally, they would be too in the market for corporate control. Inefficient firms will not last long, and if a firm is inefficient and making a lot of money (this is the only case where “monopoly” is supposed to be a problem) it will be grabbed up by another firm which sees a profit in more efficient pricing methods. That this market has been nullified by legislation is only testament to how utterly useless the government really is.
No I have not read any litterature, which is the reason why I stated I never heard any serious arguments for privatising roads, and why I startet this thread…
With high start up costs it is very expensive for a new firm to build a new road (they have to buy the land and then build a road, would cost lots of money). So if a company decides to challenge a established monopoly on the road market, they would be required to be sure to be able to earn money on the business. The established monoply though want to scare the competitor and would likely start a price war, which would be good for the consumers, but very dangerous for the challenger, and this combined with the heavy start up costs, would require heavy capital and the risk of losing I guess would often make them decide not to challenge. I think the likely result would be a heavy monoply or a an oligopol fixing prices at the expense of the consumers. This is what I call a natural a monoply where there is simply not place for more than one or to firms resulting in little competition.
If the alternative to paying big bucks to use the roads or railroads is to walk in a private society, I rather choose the government solution. For me the point of minimizing government is that government is mostly destroying wealth, and I don’t agree with abonding government just of principle. But I might be wrong in my analysis, could you eventually send me some of the links to authors who have written of this monopoly problem? Why is it btw. far more dynamic than I described? I agree that in some areas the free market would probably result in high competion, but in other places the result would be monopoly.
I guess government could eventually regulate the companys, and decide a price maximum for have much they are allowed to charge. The maximum price should be pretty high though, and should just be used in those rare situations where it is obivious that the natural monopoly was taking advantage of the lack of competion.
You must live in Europe. In the US and much of the Americas, railroads are by and large, privatized already. There are exceptions such as Alaska RR, though.
Now, some of the railroads were so heavily involved with the state that they may as well have been arms of the government (Union Pacific), but ever since railroads went through a heavy deregulation period in the early 70s this is no longer the case. There are small, medium and large railroads all over the US. Doesnt seem like much of a monopoly to me.
Libertystudent: Monopolys do not produce efficienly, no doubt, which is why there is heavy traffic. But thee free market is not that perfect either? Lets say in a market there is 40.000 potential customers. Each firm can handle 35.000 customers without there being any tailbacks. 35.000 + = tailbacks. The problem is that it is not profitable for another company to challenge the existing monoply and the end result would be a suboptimal solution in the free market because of the high start up costs. Off course the free market do better than government, but I still se the extreme high start up costs as a problem in which I favour government interference.
I don’t recall anyone claiming the market was perfect or would yield perfect outcomes.
Until there is competition, no one knows. Otherwise, you’re claiming to be able to predict the future.
And this is a natural monopoly you have proposed as an example. It has been vetted by the market process (lack of competition due to poor returns). It has been tested. A fiat government monopoly is never tested. It relies on the premise you put forth. I am a planner, and I think there can be no competition, so let’s skip the competitive process.
Why? If the government pays the startup cost, they don’t care because it is not their money. If the firm pays the startup cost, they have an incentive to succeed. In both scenarios, the startup costs are born by the same people, it’s the incentives to manage those costs and keep them low that matters. The government doesn’t have any of it’s own money to use.
I did not predict the future? I just pointed about that there probably would be some situations where the high start up costs would prevent competition, leading to lesser optimal production and higher prices for the consumers. In these situations I think government could set a limit of how much they are allowed to charge, so they did not abuse their monopoly extremely high. This would not have any effect on the markets where there is room for more competing roads, which therefore could be 100 % privately run. Another solution could be that government gave discount on the start up cost for the private firm, but then we got the problem of using tax payers money for firms, who might fail because of their incompetence. So this is probably a lesser good solution. But if e.g. most road companies had a road price pr. mile like 0,5$, and one monopoly decided to take a price of 2$even though the quality of the road was the same, and there was not any extraordinary reasons for them charging that high a price, other than abusing the low price elasticity of the consumers and their monopoly status, then I think government interference would benefit the society.
No, it’s not a “cost” to buy land and construct a road. It is an investment, an exchange of cash into physical assets. If it becomes a cost or a profit depends of how valuable those physical assets will turn out to be compared to the value of the cash forsaken for it. The sum of investment might be large, but it is no problem to mobilize even tens of billions of dollars by using the international financial markets, if you have a good case to show the potential investors.
If the established only-road-going-there-owner chooses to toll traffic so cheap that it isn’t profitable to build a second road, then how is that economically inefficient? People benefiting from using the road has no right to do it without sharing some of the benefit they get by paying the price the supplier demands (that voluntary sharing of benefits created between enjoyers to providers in the shape of paying a mutually agreed upon price, is what I personally call “solidarity”).
But what if the first road-owner keeps very high prices all the time until he cuts prices sharply under maintenance costs once the new entrant has started his new road construction? That’s the price war scenario. And an all-out price war could ultimately, as the maximum “victory” possible for the first road owner, only result in the other party going bankrupt. That means that the ownership of the competitor’s road will transfer to creditors, and likely sold on to some of the most efficient road managers in the world. They do not need to care at all about the sum of initial investments making the build of the road possible, but they need to consider only the market value of the road on buying day, what they had to pay for it. They will of course not choose to pay more than what they think that they can gain. And then the price war starts all over again. And again. And again… There is no winning it for the original only-road-owner, no matter how many times he makes the counter party go bankrupt.
During these price wars, all road users will enjoy very cheap road tolls. Wealth will actually be transfered from the loss making price warriors to the road using customers. So, there will not be any significant price war.Instead pricing will reflect the attractiveness, and the maintenance costs, of the respective roads. The one building a second road will get traffic which reflects how competitive this new road is compared with the old road.
Yeah! Like the oligopoly of CPU making is “fixing” prices to fall by 50% every 18 month… Oligopoly is a splendid way of competition. Btw, competition is actually definied as being ALLOWED to take up competition. If only one company is doing a certain thing, then that reflects the fact that noone can do it any better. Hence it would be foolish to try to compete (and to no use for any customers). Only when the single established provider starts to lag behind what others can do, only then there begins to be a reason for there to be actual competition in the shape of more than one single company doing that stuff. But on a free market there is always competition about everything everywhere in the shape of entrepreneurs who are looking for better ways to do things, armed with the liberty to try out their ideas at will.
Liberty, and only liberty, is “perfect competition”! Who then actually chooses to do what, however, is totally irrelevant to the concept of competition.
I think that you wouldn’t agree with yourself if your suggestions here were looked at closely. Government means “use of force”, and it sounds as if you are pro-government as long as you can profit from it (as long as it doesn’t destroy (your?) wealth). Someone owning a road and charging price from others to travel on it, is hardly any “destruction”, unless you compare it to what you could’ve stolen if the government had used force against the road owner on your behalf.
You did. Precisely as central planners do. You attempt to make your own evaluation of the market, and based upon your own capacity to envision solutions, declare a market feasible or not. Someone could come along and find a revolutionary way to compete and increase efficiency, but if the planners are determining if competition can happen, then the limits of economic progress will always be restrained by the capacity of the people making those determinations. And successful entrepreneurs are almost never bureaucrats.
But this is false. First, you cannot know that. Second, if that situation arose, then it is optimal. As soon as it is feasible for competition, there will be competition. The higher the price and the lower the efficiency, the more likely free competition will arrive.
Why not just let the threat of competition determine that? Why price fix? How do the planners know what the optimal price should be?
You’re going in circles. There is absolutely no reason for government to be involved. Every concern you have can be addressed and improved upon in the market. It’s very contradictory to admit monopoly is poor in the free market, then insist that a permanent state monopoly be established.
I’m not even sure what the issue with “high startup costs” is. There’s many big firms out there seeking to diversify which markets they participate in, and besides you do not need to buy everything from scratch - you can just buy up the existing firm. So the issue to me is… largely not one.
I don’t know either what Ovah is going for there. But it is a very common type of argument used by some, who are much less articulate and less curious than Ovah, in some web forums. So it needs to be understood and explained.
I think it often has to do with not understanding how future money flow corresponds to a present value via a “discount factor” reflecting risk and time preferences. That concept is indeed not common knowledge and also a bit counter-intuitive and abstract. I think this misconception has something to do with people valuing stocks (or houses) not in terms of their expected dividends or cost savings over time, but only in terms of hopes about how much they suddenly, without any explanaition asked for, might jump up in price. The buy low - sell high mentality. With bonds it is much more intuitive that interests paid over time actually is what what the bond should be worth. But when it comes to stocks, or direct investments such as the construction of a road, that concept of valuing todays effort by what it might bring in the future, seems to not enter many peoples minds too easily.
An even worse misconception, not rarely met on forums, is that “only the goverment can mobilize enough money to make such a large investment”… Hell no, I could do it, if me too I could simply use force to rob everyone from everything I desire!
Less than optimal makes little sense here. It only seems obvious that there would be a high cost of investment for something that would yield large returns, else everyone would be taking the risk. Since people rely on roads for almost everything, the subjective value of road use is necessarily high. If a road company invested in a large toll highway, naturally they should expect to see large gains. If they were charging “too much” for the roads, they would see a loss in profit.
Cost of investment (risk) doesn’t “prevent competition” in the way you’re framing it. It’s a fact for any entrepreneur that they will have to make risks. The fact that some are unwilling to make the investment necessary in starting up their own road (due to the cost of accumulating enough capital to make it profitable) doesn’t show a lack of competition. It demonstrates that the owners of successful road companies are able and smart enough to handle the risk involved, while those who don’t want to make the investment aren’t, or don’t believe they are. So the prices they are charging are directly related to the ammount of risk they are taking in creating their service, which doesn’t seem the least bit undesireable.
… You’re just substituting monopolies. Now you want a monopoly price fixer to remedy the monopoly road company.
Not to mention that price fixing just leads to diminishing quality, deficits, and more price fixing.
Because it’s immoral to subsidize an industry through theft, and because such subsidization crowds out private industry which would provide better options, and because socialism is a terrible way to provide anything, always leading to over or under allocation, and thus leading to decreased supply and quality.
That’s not enough for you??? Or have you just never heard this?
