23. Does monopoly always result in a higher price being asked for the monopolized article?
CHAPTER XXVIII
PUBLIC INTEREST IN BUSINESS: OWNERSHIP
337. BASIS OF NATURAL MONOPOLY.—The most important examples of natural monopoly are found in those industries which are known as public utilities. Public utilities include gas and electric light works, waterworks, telephone and telegraph plants, and electric and steam railways.
These industries are by their very nature unsuited to the competitive system. This is chiefly because they operate under the principle of decreasing cost, that is to say, the greater the volume of business handled by a single plant, the less the cost of production per unit. In order to serve 100,000 customers with gas, for example, it may be necessary to make an initial outlay of $90,000 in plant and supplies. With this identical plant, however, the gas works could really manufacture gas sufficient to serve more than 100,000. If, later, the city grows and the number of customers using gas doubles, the gas works, already having its basic plant, will not have to expend another $90,000, but only, say, an additional $30,000.
This principle has the double effect of virtually prohibiting competition and of encouraging combination. Since a street or a neighborhood can be served with water or gas more cheaply by a single plant than by several competing plants, competing plants tend to combine in order to secure the economies resulting from decreasing cost and large-scale production. On the other hand, the cost of duplicating a set of water mains or a network of street car tracks is so prohibitive as to render competition undesirable, both from the standpoint of the utility and from the standpoint of the public.
This natural tendency toward monopoly, together with the social importance of public utilities, has given rise to a demand that businesses of this type be publicly owned. The problem of public ownership may be considered under two heads: first, the municipal ownership of local utilities; and, second, the national ownership of steam railroads.
A. MUNICIPAL OWNERSHIP
338. REGULATION OF LOCAL UTILITIES.—In many American cities it was formerly the custom of the city council to confer valuable privileges upon public service corporations on terms that did not adequately safeguard the public interest. In making such grants, called franchises, city councils often permitted private corporations the free use of the streets and other public property for long periods of time or even in perpetuity.
The abuses growing out of the careless use of the franchise granting power have recently led to a more strict supervision of franchises to public service corporations. In most cities, franchises are no longer perpetual, but are limited to a definite and rather short period, say fifty years. To an increasing extent, franchises are drawn up by experts, so that the terms of the grant will safeguard the interests of the public. In many states there are now public service commissions that have the power to regulate privately owned utilities. The chief aim of such commissions is to keep informed as to the condition of the utilities, and to fix rates and charges which the commission considers fair and reasonable.