Re: California

[Sven R Larson <slarson@xxxxxxxxxxxx>]

This theory already exists. Every 100-level micro student learns it.
/srl

Leigh Harkness wrote:
>
> 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

--
Dr. Sven R Larson
Department of Economics
Skidmore College
815, North Broadway
Saratoga Springs, NY 12866
(518) 580-5278