Wednesday, June 21, 2006

Monopoly: Public vs. Private

Recently, the State of Indiana leased the Indiana toll road to a Spanish-Australian consortium for 75 years. This is an important step in the direction of privatization. The concerns about privatization – that is, the government giving over responsibility for an industry or utility to the private sector- are numerous. Most notably, those against privatization argue that privatization creates monopolies that extort the consumer. I argue that this concern is entirely unfounded.

First, let’s compare private companies and public, government operated ones. Private companies are far more efficient than public ones, especially with regards to setting prices and costs. This is because private companies have both a strong financial incentive and also competitive pressure to do so, something public companies do not. Furthermore, private companies’ pricing and purchasing decisions are not distorted by political pressures, or corruption, as public companies are. The problem arises, in regards to privatization, when the privatization of certain industries, companies or utilities leads to a monopoly.

Monopolies clearly are not beneficial to the consumer. They inhibit competition, innovation, and have the ability to extort consumers. Private monopolies are, however, a better alternative than public run companies. To begin with, we must understand that public companies are themselves monopolistic by definition. Therefore, in a public company, not only is competition inhibited, innovation stunted, and the consumer extorted, but pricing decisions are based almost entirely on petty politics and corruption. The other, and more important, difference between public monopolies and private monopolies is that while no possible alternative exists to a public monopoly, if a private monopoly exists, ever-changing technology and processes can bring competition to what appear to be protected markets if the profits are large enough. Take, for example, the monopoly that Microsoft held in the 1980s and 1990s. Microsoft was believed to the only available option for desktop users during that time, yet if Microsoft was not privately operated, we would not see today the other options that exist for PC users, such as Macintosh and Linux. Why? Because in order for a publicly run company to operate efficiently, and with profit, it must hold a monopoly on the services that it provides. This is logical, as public companies, which are far less efficient and profitable than private ones, would not be able to compete against privately run companies. So, in order to allow a public company to operate effectively (which, in actuality, it cannot in any situation) it must prohibit competition using its state power. This does two things: limit the freedom of the individual, and effectively prohibit any competition possible.

There are certain situations in which “natural monopoly” exists, because it is neither efficient, nor economical for there to exist competition in a given industry. If we take the Indiana Toll Road, for example, it is not at all economical for a competing company to build a toll road alongside the already existing toll road, so monopoly becomes inevitable. It is still, however, more efficient for the toll road to be privatized, as long as controls are imposed on prices levied by the company operating the toll road. This is because the operation of the toll road takes politics and corruption out of the business, and as long as the controls imposed on the company are just and fair to both the consumer and the company, a private monopoly allows the toll road (or any other industry) to be operated more efficiently.

Obviously, competition is the ideal, and monopoly, especially natural monopoly, is not. However, I believe that natural monopolistic situations are far less common today than they were, because of the ability of technology to foster competition, and allow companies that previously could not enter markets, to do so. Take as another example, AT&T. AT&T held a monopoly on telephone services in the United States, which was thought to be a natural monopoly, but new technology brought about cell phones and the internet, and the inability of AT&T to adapt to new competition has left them in the dust.

I am strongly in favor of privatizing all public enterprises when competition is effective and available, and would in most cases strongly support privatization of public enterprises in which no competition at the moment exists. Why? Because competition will always arise if profit is available, and in all industries in which a market exists, so does a profit.