The Federal Reserve system and monetary policy

¶ … Government Sanctioned Monopoly: The Electric Company: for the Public's Good or Ill?

The defined concept of a monopoly causes many students of economics to assume that any company that engages in monopolistic practices is automatically illegal, according to the Sherman Anti-Trust Act of the United States. A monopoly simply stated is an economic entity that completely dominates one facet of industry or one service industry. It alone sets the price of the good or service it is selling, because it has no competition, in contrast to the perfect competition of a competitive marketplace or even the limited competition of an oligopolistic marketplace. But occasionally the United States government allows certain organizations to behave as corporate monopolies for the public good, such as electrical power.

The reason electrical power companies are one a such a market situation where monopolies are allowed, in fact encouraged (as these utility monopolies are not generated by economic accident) is that for both technical and social reasons there cannot be more than one efficient provider of electrical service. This is why power companies are usually considered to be natural monopolies.

The concept of a natural monopoly and the lack of efficiency generated by the concept of electrical power and other utility markets thus has always created a dilemma for the theories neoclassical economics and market economists. Such economists usually assume that the classical laws of supply and demand should hold sway over any economy, come what may, regardless of the good or service. The laws of supply and demand hold that as price increases, so should the supply.

But with goods and services that tend to be classified as natural monopolies, such as the electric company there is one indivisible and often high cost for the provider or corporation. Then, once this start-up cost is paid, the firm can produce an unlimited amount at a constant marginal cost. This makes electricity unlike the production of other goods, and the provision of electricity to customers in a particular region or area, such as Jersey Central Power and Light in the New Jersey area, different from, for example, a manufacturing company that produces shoes, which can alter its production rates within certain limits depending on demand or the cost of input goods such as wages and fabric, or a franchise providing cleaning services, which must continually replenish its stock of start-up goods such as cleansers, and allow for the depreciation costs of its vacuums and scrub brushes.

Thus, electricity is a classic example of a natural monopoly. "Once the gargantuan fixed costs involved with power generation and power lines" are paid "each additional unit of electricity costs very little" and thus "the more units sold, the more the fixed costs can be spread, creating a reasonable price for the consumer.

Having two electric companies to compete against one another, or many small electricity companies that users could chose from would split electricity production. Then, each company would have to have its own power source and power lines. This would lead to a near doubling of price, as initial input costs are so high.

Clearly, competition, despite is proud position in the American capitalist market economy, is not always the answer to such dilemmas, when, as with the electricity industry, the good or services long run marginal cost is completely horizontal on a graph of industry supply and demand, but the long run average cost of the good or service being produced is downward- sloping.

The dilemma of how to cope with the need for such an economic situation in the electrical industry is that the output where the marginal cost of the goods and services being provided are equal to the price. They are still the most efficient output, despite the expense of the original outlay, and the low cost of selling the good cannot cover the total costs of the good or service. On one hand, in its own self-interest, a profit-maximizing monopoly should produce much less of a particular good or service, and hold true to only producing a supply that covered its costs. But such a supply would inefficient. Such a supply would needlessly limit the service or good and restricting public access for no reason other than to make a profit.

Furthermore, the provision of electricity is both a good and a service that is integral to the functioning of the larger economy, as both personal, private industry, and government industries, are all dependant upon the smooth running of electrical power at a low cost.

Government ownership could, in principle, solve the problem of the need for a natural monopoly and the vitality of electricity to the economic infrastructure of a nation or a region of the country, since the federal or local government could operate the electricity monopoly efficiently, charging a price equal to marginal cost, and cover the losses out of tax revenues. In practice, however, "government monopolies usually seem to have been operated as "cash cows" for the government, and that's not a solution to the problem of high monopoly prices!" In recent years even many of the formerly sacrosanct government monopolies, such as the telephone companies in Europe, have been privatized in a response to the prevalence of corruption in state-controlled as well as state-sanctioned monopolies of the utility and other industries.