Re: California

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

John

You raise some interesting points about market failure.
One issue that arises is that economists need to have a theory about when a
monopoly is an economically optimal outcome.

At the moment, there is a an ideology being preached in economics that the
best outcomes are attained in almost every situation if a competitive market
is established.

Yet there must be cases when this is not the case.

For example, we accept that there should only be one system of roads.  But
what about railways, shipping ports, airports, airlines, postal services,
bus services, electricity networks, telephone networks, regional shopping
malls, etc.

There must be rules that say that for a certain situation, it is best to
have one supplier.  Then as we change the economic environment we reach a
point where it the economic optimum may be two suppliers and so on until we
reach a situation where there are an unlimited number of suppliers.  Some
industries may never reach a point where they warrant more than one
supplier.

For example, a private sector monopoly would be an optimal economic outcome
for an industry if the elasticity of demand and marginal cost were such that
profits could be maximised by reducing prices.  Thus for a region, a single
airliner may be an optimal result if by reducing air fares, it could
increase the load to make its routes more profitable.

Putting a second airline in this region would create two unprofitable
enterprises, both trying to undercut each other to get the load but neither
able to operate profitablely.  It would be economically desirable if one of
those airlines withdrew.  It would be a case of market failure if both were
to collapse or if no airline establish because of the risk of competition.

There may be other situations where public sector monopolies are
economically optimal outcomes, such as for roads, water, drainage,
electricity and telephone networks.  In each of these cases, the predominant
cost of providing the service is incurred regardless of whether the customer
accepts the service.  These services are best provided by the public sector
(or a regulated private sector) because the monoplist in this case can raise
profits by raising charges.

The attempts to create competition in an environment best served by a
monopoly creates new forms of market distortions as you have described.

Leigh