walton@ametek.UUCP (08/05/86)
(I know I said I didn't have time, but I can't resist replying to
this, from Poli-Sci V26 #3).
Keith Lynch writes:
Right. It was said that the long distance phone rates were high
because rural customers were being subsidized by urban customers.
And that if competing long distance firms were to be allowed, that
rural rates would hit the ceiling. Well, rival carriers WERE
finally allowed, and rural rates have gone DOWN, as have urban
rates. AT&T discovered that they COULD lower their rates, if they
needed to to stay in business.
Wrong. Long distance phone rates were being used to subsidize local
service for everyone, urban and rural. The difficulty was that said
high long distance rates were primarily being paid by businesses who
discovered that they could set up their own, private, long distance
service. Now, local rates are going up, deprived of their subsidy. I
don't know about anyone else, but my phone bill is in fact higher than
it was, because the decrease in the cost of my long distance doesn't
make up for the increase in the cost of my local service. I just paid
$37.50 to have my phone service moved to my new address; that used to
be free (in the sense of being included in my basic monthly service,
which is some $10 per month).
Now if only they would allow competing LOCAL phone companies!
There used to be such. But it wasn't very good. Can you imagine the
VHS vs. Beta vs. 8mm video competition extended to telephone service?
You fail to take account of the (admittedly few) cases where a given
course of action benefits everyone, but in a way which is so diffuse
that no one person benefits enough to make it cost-effective for them
to take the action first.
To draw an analogy, clearly the motorists on the LA freeways (where I
live) would be better off if they car-pooled. Even if they each found
only 1 other person with whom they ride-shared once a week, it would
reduce the number of cars on the road by 20%, which would eliminate
rush-hour traffic jams (evidence: a decrease of 4% during the Olympics
eliminated most of them.) But, if only a few people car pool, they
give up the freedom of choosing the time they arrive, the time they
leave, and where to go for lunch, AND do not benefit from a reduction
in the number of cars on the road, because it isn't large enough to
make a difference. So no one car pools.
One of the main points that opponents of pure capitalism often
make is that without government, there would be nothing to prevent
monopolies from forming and driving up prices and reducing
quality. Well, they are certainly correct that monopolies drive
up prices. And that they reduce quality. But the only way
monopolies can exist is if government mandates it.
Not true. Telephone and electric power are two examples of what
economists call "natural monopolies." They are called that because,
based on the available empirical evidence, it is always possible for
the largest company to offer the cheapest service. In most
industries, a given firm has a natural size, namely the one which
minimizes its cost of providing its goods or services, and that size
is such as to allow several competitors. If the size of the company
increases, its costs either remain the same or actually go up. This
doesn't appear to happen with telephone or electric service, hence the
term "natural monopoly," because the largest company can ALWAYS
undercut its competitors' prices, drive them out of business, and then
raise prices to monopoly levels.
In the 19th century, many railroads had a monopoly over their
service area, since the government gave them land for free and
forbid any other railroad from operating in the area. It is
ironic that the resulting bogus price structure was blamed on
capitalism, rather than on government interference.
I know of no reputable economist who disputes the fact that the
Interstate Commerce Commission was responsible for said "bogus price
structure." People who believe otherwise cannot prove their case.
Today, most areas have monopolies in
local phone service, electric power, and water. There are a few
places with competing phone service and/or competing power
service, and the prices for those services is generally much lower
than where they are a monopoly.
Name one.
I believe you give too much credit to the enemies of capitalism, and
that you do capitalism a disservice by refusing to admit that while it
is the best possible economic system, it is not perfect. The latest
Time magazine documents the fact that capitalism seems to be spreading
in the Third World; they've tried the Soviet centrally-planned model
and found it just doesn't work. To which I shout, "Wonderful!
GREAT!" But let's not ignore a few flaws, such as the natural
monopolies described above, flaws to which I see no remedy other than
government intervention in the market.
Steve Walton
-------kfl%mx.lcs.mit.edu@MC.LCS.MIT.EDU (08/10/86)
From: Mills@MIT-MULTICS.ARPA
Monopolies can and would form under PURE capitalism. ... Once a
large, wealthy person or business controls most of a market, it is
relatively easy to keep your current market share and get most of
the rest.
Only if their services and prices are at least as good as the
competition. Otherwise competitors would flourish. Or would come
into existance if there weren't any.
It can ... be bad if they simply buy out the competition, sell
products at a loss until there competition goes under, ...
This would be pointless unless they kept the prices down after the
competition goes under (in which case consumers would benefit).
Otherwise, competitors would spring up again and they would have to
repeat this expensive cycle over and over until they went broke or
got wise and started selling for a fair price.
...Keith
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