[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

marginal cost and to make up the deficit with revenues from other services, a practice
referred to as cross subsidization. Thus, business customers of utilities are
sometimes charged more, relative to the actual costs of serving them, than are households.
This practice in effect involves a hidden tax and a hidden subsidy; businesses
are taxed to subsidize households. The same phenomenon can be seen in our most
important public monopoly, the U.S. Postal Service. It charges the same price for
delivering mail to small rural communities as it does to major cities, in spite of the
large differences in costs. Small communities have their mail services subsidized
by larger ones.
How much less efficient the government is as a producer than the private sector
is difficult to determine. Efficiency comparisons between government-run telephone
companies in Europe and America’s private firms provided much of the motivation
for the late-twentieth-century privatization movement—the movement to convert
government enterprises into private firms. Britain sold its telephone services and
some other utilities, Japan its telephones and railroads, France its banks and many
other enterprises. Not all publicly run enterprises are less productive than their
private counterparts, however. For example, Canada has two major rail lines, one
operated by the government and one private, which differ little in the efficiency with
which they are run—perhaps because of competition between the two. Many of the
publicly owned enterprises in France seem to run as efficiently as private firms,
perhaps because the high prestige afforded to those who work in the French civil
service enables it to recruit from among the most talented people in
the country. There may also be less difference between government
enterprises and large corporations—particularly when both are subjected
to some market pressure and competition—than popular
conceptions of governmental waste would suggest.
p m
Demand
curve
REGULATION
Some countries leave the natural monopolies in the private sector but
regulate them. This is generally the U.S. practice. Local utilities, for
instance, remain private, but their rates are regulated by the states.
Federal agencies regulate interstate telephone services and the prices
that can be charged for interstate transport of natural gas.
The aim of regulation is to keep the price as low as possible, commensurate
with the monopolist’s need to obtain an adequate return
on its investment. In other words, regulators try to keep price equal to
average costs—where average costs include a “normal return” on what
the firm’s owners have invested in the firm. If they are successful, the
natural monopoly will earn no monopoly profits. Such a regulated
output and price are shown in Figure 13.4 as Q r and p r .
Two criticisms have been leveled against regulation as a solution
to the natural monopoly problem. The first is that regulations often
introduce inefficiencies in several ways. The intent is to set prices so
that firms obtain a “fair” return on their capital. But to make the highest
level of profit, firms respond by investing as much capital as
PRICE (p)
p r
Marginal
cost curve Marginal
revenue
curve
Q m Q r
FIGURE 13.4
QUANTITY (Q )
REGULATING A NATURAL MONOPOLY
Average
cost curve
Government regulators will often seek to choose the
point on the market demand curve where the firm provides
the greatest quantity at the lowest price consistent
with the firm covering its costs. The point is the quantity
Q r and price p r , where the demand curve intersects the
average cost curve.
POLICIES TOWARD NATURAL MONOPOLIES ∂ 295