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Two notes on this: The first is that barrier to entry for power companies is that they're enormously expensive to set up - they're huge up-front capital costs
by roughly 3y ago
Two notes on this:
The first is that barrier to entry for power companies is that they're enormously expensive to set up - they're huge up-front capital costs with extremely low per-unit costs. This is, as several others have pointed out, the textbook scenario for natural monopolies, in which left to its own course, one company will capture the entire market.
The second is that typically the reason a power company is then granted an explicit monopoly is because there's a social need to deliver power to places that are more expensive to provide to than the civic center, and usually the monopoly is provided with stipulations that the company must deliver power to these areas. This is for two reasons - the first is otherwise nobody, no matter how much competition is in the market, is going to deliver power to those areas, because it's fundamentally uneconomical, and the second is that the company that does try to provide power to those areas will be undercut by the company that isn't. A chartered monopoly in this case is to work around the fact that the market _does not work_ for provisioning these goods - left to its own devices, the market would not provide power to many distant rural areas.
The basic conflict here is between a social good with diffuse benefits - electrification in rural areas is generally considered a net positive for productivity, health, society, etc., and pride of place, but it's deeply uneconomical on a unit basis, and so the market solution does not deliver here.
Sometimes the math says the market's the best choice, sometimes it does not. For large-scale provision of high capital cost goods across a geographically distributed area of variable population density, the math says the market doesn't work out.
- willcipriano 3y ago> the math says the market doesn't work out. I get it. But if that's true we should be able to make it easier for firms to build competitors and worst case, nothing happens right? The fact is power companies enjoy things like access to public land or rights to use poles, often granted to only them explicitly. If they are truly a natural monopoly they won't need the effective legal monopoly protection.
- roughly 3y agoBecause the equilibrium point for the natural monopoly is worse than that for the chartered monopoly, both for the company and the region it serves. For the company, the natural monopoly state still has them having to negotiate rights of way, etc, in a way that raises overall cost and complexity of provisioning the service. For the region, the natural monopoly state leaves outlying and areas less economical to serve less well served and leads to higher rates, because, monopoly. So, a chartered monopoly allows the company to operate at lower cost and less uncertainty and allows the region to enforce both quality and quantity of service as well as have some control over rates.
- willcipriano 3y agoHow would a competitor even get established if economies of scale provide such a large advantage? The only way that would work is it the current power company has very wide margins.
- roughly 3y agoI encourage you to go back and re-read my previous posts, paying attention in particular to what is asked of the company granted the monopoly in exchange for the charter. To refresh, the companies are obligated to take on less and potentially uneconomical customers, and to provide them services at rates below what the market would ordinarily demand. This is done as a social good. This puts the chartered monopoly at a potential disadvantage to competitors without a similar obligation, who are not required to bear the cost of provisioning service to those customers or can pick their markets more carefully. Once again, the natural monopoly state is less service to fewer customers at a higher price.
- willcipriano 3y agoSo update that regulation to a version that assumes competition. Force power companies to deliver power to a percentage of the unprofitable customers roughly proportionate to their total market share of the profitable customers. Could also force the encumbant to rent unprofitable customers at their cost to upstarts to make it easier for them, sort of like carbon credits.
- kristopolous 3y agoYou just redefined private property and capital from base principles. There's exclusivity, freedom of use, and protection. You're not actually proposing an alternative. You're "comparing" a word with its definition. The difference doesn't exist