Reply To: How does the market deal with Utility Companies

Home Forums Discuss Austrian Economics, Step by Step How does the market deal with Utility Companies Reply To: How does the market deal with Utility Companies

#17393
jmherbener
Moderator

Public utilities are creatures of the state. It’s unlikely private enterprise would have built them in their current configuration. So it’s not a failure of the market that they cannot operate as a normal business. The same is true of many government supported enterprises, e.g., central banks and fractional-reserve commercial banks.

Here is a brief history of regulation of public utilities.

http://www.nber.org/chapters/c9986.pdf

That issue aside, the unstated premise of your inquiry seems to be that it would be socially harmful if private enterprise resulted in a single seller of a gas or electricity in each local area. But that’s not true. The market doesn’t exist to favor consumers over producers, The market is concerted effort, the attempt of all of us to arrange a division of labor to best satisfy our preferences. If a single enterprise supplies the entire demand for some good profitably, then that arrangement is efficient. Even if one can imagine other arrangements that favor buyers more than sellers or sellers more than buyers,

The way the division of labor might have emerged in power generation within the free market goes as follows. There is a group of capitalists and entrepreneurs who want to build a power generating facility and sell the power to customers in a small community. Currently the customers generate there own power or appeal to other market produced sources of power. For example they chop down trees and burn the wood to heat their homes or they power their lanterns with kerosene produced by a company. To transmit the power produced in the generating facility, the entrepreneurs have to buy land for the facility preferably in the most advantageous location and lay transmission lines to customers’ homes. To do so, they must pay the owners of the land upon which they plan to build and they must pay to obtain permission of the owners of the land upon which they plan to to lay transmission lines. The owners of the land can then negotiate favorable terms for the price of electricity since the power company cannot sell to them without transmission lines.

The same principle would apply today if power generation was privatized. Homeowners would then own the transmission lines on their property and be able to negotiate favorable terms with power companies. If power generation were still enormously profitable, then entrepreneurs would have monetary incentive to develop alternative technologies that could generate power onsite at each house, like hydrogen fuel cell electricity or propane powered heat.

Undoubtedly, if the state had stayed out of power generation, the system would look much differently than it does.