The Problem:
The philosophy behind the existence of government owned and/or regulated monopolies in the United States (utilities, transportation, etc.) is deeply flawed and misguided. In my economics class, I was taught to believe that private monopolies were bad for consumers because the monopolist would price gouge due to no competition and that an appropriate solution to this problem (aside from anti-trust laws) is to have the government either takeover or heavily regulate the monopolist company. "The Theoretical Private Monopoly" graph below shows how this was explained to me:
A private monopolist would purposely produce a low quantity, QM, and charge a high price, PM. to make excessive economic profit. This was simply evil and so I was then shown "The Theoretical Government Owned/Regulated Monopoly" graph below, which shows the "solution" to this price gouging:
The government, I was told, would produce at quantity QR, charge price PR, and only seek normal profit in order to keep prices low for consumers.
Sounds great to me… except, this is not reality. Oh yes, it looks amazing on paper... and quite convincing too. The intellectual elite must feel very proud coming up with all of these fancy graphs. But it really doesn't make sense, and in fact, flies in the face of reality. Just because there is no competition at the moment does not mean the threat of competition does not exist, and, this is where the incentive comes into play for the monopolist to keep prices low. It makes sense that in a market that allows private monopolies, the monopolist would keep prices low, not high, to maintain its hold on the market. If it does not, new competition has the potential to produce more efficiently and at a lower cost, essentially ending the monopoly currently in existence. Private businesses are always seeking to cut costs, which, in the end, allows them to reduce prices. The same holds true for monopolies as well… except for… you guessed it… government monopolies!
Government monopolies do not have to be concerned with competition or the threat of competition since the government has deemed competition illegal (ie. USPS). Because of this, the government monopoly has no incentive to run efficiently or to cut costs since they are not seeking economic profit and therefore just raise prices when their costs increase in order to break-even. Does this sound familiar to any New Yorkers?… Oh, that’s right; the MTA just raised its prices…again!
The Solution:
The solution that makes most sense is to repeal anti-trust legislation and allow for private monopolies in the free marketplace. A monopolist would have a long-term self-interest in keeping prices low in order to keep his company's status as a monopoly. Some may say, however, that barriers to entry prevent new competition from arising in certain markets, and thus, create conditions that allow monopolists to charge extremely high prices without even the treat of competition. I have found this to be a common fallacy made even by the most prestigious economists. As technology improves over time, newer and more efficient methods of production are introduced into the marketplace. The world sees this play out on a daily basis. And because of this, eventually, monopolies collapse. Case in point: The United States Postal Service's monopoly on standard mail. With the introduction of the Internet, and more specifically, email, the monopoly status of the USPS has been completely undermined, and eventually, it will cease to exist. The same also applied to AT&T's monopoly in the 1970s on telecommunication services. Again, technological advances caused it's monopoly status to crumble. It's important to note, both the mail and telecoms services are/were seen as natural monopolies, where competition was said to be close to impossible due to the nature of the business. Again, this was the argument for government regulation and ownership of the monopoly.
(As a quick side-note in regards to barriers to entry, I must also mention the merging of political and economic power, which happens under our current system, with the result being regulations and decreased competition1. In a true laissez-faire system, political power and economic power are separate and collusion with government bureaucrats is impossible due to the fact that the government would not have a hand in economic matters. Ayn Rand referred to this collusion as the "Aristocracy of Pull," defined as "a new group of powerful [business]men who have reached their status not by means of talent or initiative, but by means of political connections."2)
Why private monopolies are viewed as something bad I have no idea. It is said they are anti-competitive but I feel they are the epitome of competition. As in any competition, there are winners. Monopolies are simply the winners of the specific industry they are a part of. To use a sports analogy, the free market is like baseball. Teams compete to win. In the history of baseball, the New York Yankees have the most World Series championships than any other team by far, with 27 wins in the American League. The second place team, the Boston Red Sox, have only 7. If baseball operated under anti-trust laws, the New York Yankees would be fined severely and broken up. Does this seem fair? We have to understand that in competition, there will be winners and losers. It's a fact of life. Businesses should be treated no differently. A company that has achieved monopoly status in a free market did so because it was the absolute best. A lack of competitors does not mean something nefarious was going on or that monopolists are even safe from competitors. Monopolies must still compete, albeit indirectly, with the constant threat of new entrants to the market.
1See The Answer to Regulations
2CliffsNotes: The Aristocracy of Pull
