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The very term “public utility” . . . is an absurd one. Every good is useful “to the public,” and almost every good . . . may be considered “necessary.” Any designation of a few industires as “public utilities” is completely arbitrary and unjustified.
—Murray Rothbard, Power and Market
Most so-called public utilties have been granted governmental franchise monopolies because they are thought to be “natural monopolies.” Put simply, a natural monopoly is said to occur when production technology, such as relatively high fixed costs, causes long-run average total costs to decline as output expands. In such industries, the theory goes, a single producer will eventually be able to produce at a lower cost than any two other producers, thereby creating a “natural” monopoly. Higher prices will result if more than one producer supplies the market.Furthermore, competition is said to cause consumer inconveinance because of the construction of duplicative facilities, e.g., digging up the streets to put in dual gas or water lines. Avoiding such inconveniences is another reason offered for governmental franchise monopolies for industries with declining long-run average total costs.
It is a myth that natural monopoly theory was developed first by economists, and then used by legislators to “justify” franchise monopolies. The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists, who then used the theory as an ex post rationale for government intervention. At the time when the first government franchise monopolies were being granted, the large majority of economists understood that large-scale, capital intensive production did not lead to monopoly, but was an absolutely desirable aspect of the competitive process.Link to Full Article. Appears in The Review of Austrian Economics Vol. 9, No. 2 (1996): pp. 43-58.
Permalink: http://mises.org/jou...df/RAE9_2_3.pdf
Thomas DiLorenzo is professor of economics at Loyola College, Maryland, and a senior fellow at the Ludwig von Mises Institute. He is the author or co-author of ten books, on subjects such as antitrust, group-interest politics, and interventionism generally.
The Review of Austrian Economics, the predecessor to the Quarterly Journal of Austrian Economics, was founded and edited by Murray N. Rothbard and functioned as the premier Austrian School scholarly journal between 1987 and 1997. After 1995, it was edited by Walter Block, Hans-Hermann Hoppe, and Joseph T. Salerno. Published first by Lexington Books and later by Kluwer Academic Publishers, the journal played a central role in attracting a new generation of economists to the theoretical foundations established in the work of Carl Menger and Ludwig von Mises. It is now permanently archived on this site. The contents of volumes 11 and following are available here.
Note: I did not write any of the above. It has been copied and pasted from other sources, most of which appears in the hyperlinks. All I did was format this post and add the relevant links. Any errors are my own, and not the original author(s).
