"We're heading toward socialism, and nothing and no one can prevent it"
Nick Gillespie | January 9, 2007, 1:04pm
That's Venezuela's Hugo Chavez, crowing in a Washington Times story. Some snippets:
The nationalization appeared likely to affect Electricidad de Caracas, owned by Arlington-based AES Corp., and C.A. Nacional Telefonos de Venezuela, known as CANTV, the country's largest publicly traded company.
"All of that which was privatized, let it be nationalized," Mr. Chavez said, referring to "all of those sectors in an area so important and strategic for all of us as is electricity."
"The nation should recover its ownership of strategic sectors," he said.
Chavez gets sworn in tomorrow for a third term as president, which will take him through 2013. More here.
VM | January 10, 2007, 10:34am | #
BG:
Good question, and I'd like to kick around an amateurish answer. If someone out there knows the real reason, please throw it into the mix!
There are some markets that aren't really competitive due to structures that prevent competition, thereby making the market mechanisms of "the free market" impotent (for example, barriers to entry and exit, no close substitutes, relative power of supplier, relative power of consumer - to paraphrase Porter's Five Forces).
Electricity markets oftentimes have huge barriers to entry (so the threat of competition is reduced).
Other features that make a competitive market for electricity difficult to achieve is that the service provided is price inelastic: it is essential, but an extensive infrastructure/power grid/ physical network (what have you) must be in place before the demand is there. This constitutes a huge barrier to entry.
Another feature that has historically been noted is that the benefits and costs of the externalities aren't realized by those directly involved - this can prevent a competitive market situation from finding an optimal level.
(for example: pollution from the creation of electricity is a direct byproduct; or phone companies don't realize the benefits of deals made by other agents who happen to use their phone system).
You know the term "natural monopoly", often mentioned as a list of "regulated local monopolies: public utilities".
"A firm that is the sole producer of a good that has few close substitutes and that the has average and marginal cost curves that decline continuously throughout the range of demand" (therefore it's relative to the market)
The costs of entry and exit are prohibitively high: most costs are fixed rather than variable, and the short run is a long time horizon.
Appealing to economies of scale is always noted in books as being a misleading reason as why these natural monopolies form, instead pointing out that "indivisible fixed inputs" might be a better way of describing it. I remember someone blathering about "non-fungible input assets", but we'll drop the curtain of charity on that phrase.
Your point about how to share the grid and how to induce consumers to switch your BG Brand Electricity (patent pending) is a difficult one that is sometimes labeled "customer inertia" (or something like that), and that is also considered to be a structural barrier to entry.
Maybe, if private solar panels or other private forms of creating and storing energy become cheaper and more prevalent, there will be changes in how the markets work.
You might have some local competition in areas with certain conditions (say, water, geothermal, wind, and solar all abundant), but there would still be the issue of how to get the power to the consumer. A shared grid? Separate grids? Separate grids might be possible, if this is a small area, so the initial costs aren't too great. Even now, supply comes from different sources, but distribution is still through the, um, usual channels.
Even if one can get by the structural barriers, the above-mentioned scenario might face other, legal barriers to entry.....
I guess it is possible to come up with a stylized scenario where you have a competitive market, but we'll need an expert to see whether those markets are limited in size and scope.
One thing that's important to remember, and that we in Libertopia have to consider when thinking about the world is that there are plenty of segments of the economy that, for a variety of reasons, have structural features that retard or even prevent competitive market forces from coming into play.
VM | January 10, 2007, 5:47pm | #
Basically the same issues as the electricity - how you create it (source), how you get it from A to B.
All of those issues are barriers, both in terms of physical plant and in terms of capital expense. (Actually, the physical barriers you mention can be quantified, and I was actually thinking of them as a "barrier" and included it, at least internally - and that's the whole point that the barriers are prohibitive, not just difficult to overcome)
You also have mentioned how public utilities make use of parallel structures - gas, water, electricity, and roads follow a path - so, yes that is exactly the problem in establishing a competitive market situation.
It is an interesting case where the barriers hinder a competitive market situation. It does happen, it doesn't discredit market-based solutions, it just frames it. (Not a black and white world)
Water is even more cut-and-dry, as it were, because, what we're going to have the choice between source A and B? If there were such a way of doing it (competing reservoir services??), you are exactly right with the piping issues.
That is a great example of the legal and physical barriers that also hinder a competitive market situation with the water piping (you list it as physical, but it is essentially an E.D. issue, so it's legal)
The economic barriers to entry are much larger than how you portray them, in this case - they are prohibitive. It goes beyond experiencing losses, especially if there already is a utility that is providing service.
As for your final point, "So I'm not sure how you could have a free maket in water supply, with the government take a general stance of non-interference."
I don't quite understand what you're driving at? What you perceive to be an internal inconsistency? You asked about public utilities and free markets - I sketched out some stuff that does apply to water, too. I focused on electricity, as that was the point of the lecture on it.
