Hey All!!
I was speaking with a friend of mine yesterday about certain industries and whether gov't intervention can have a good or bad impact. I blew him away on both health & education, but when it came to rail transport he made a few points which left me wanting a half decent answer.
His argument revolved around the fact that given only one rail line, any owner of the actual trains would be able to raise prices to a monopoly/superprofit price. As no-one would be able to compete, and the chance of another line being built to the same place being slim, then it would not serve the community to have a free market in this situation. I gave him a speech about how the private company would increase capacity, modernise & generally cater more to customer expectations. But his point did strike home a little.
My question specifically relates to rail, but i believe it could be to other natural monopolies; How can we justify the higher prices that these monopolies charge using austrian economics??
This may be a good starting place for you:
http://mises.org/journals/rae/pdf/rae9_2_3.pdf
If these are indeed "natural" monopolies, then the prices are not higher. "Higher" than what? The prices must be lower than their competitors to maintain a market share that would constitute a monopoly and this would be impossible if the price is "higher" than the market price. If it is a government monopoly, well the problem remains the same. Prices "higher" than what? Without the potential of competition, it is impossible to know what the market price would otherwise be. Indeed, the price may be lower than the market price as a result of subsidies and land grants. A lower than market price through government subsidy can push competition out of the market as well as regulation and outright prohibition can.
Natural monopolies always have the threat of competition to keep the price at market level. Government monopolies may charge more (or less) than what would otherwise be found in a market setting because the threat of competition is non-existent. There is no Austrian argument to justify higher than market prices through government intervention. However, Robert P. Murphy does provide an Austrian argument for taking advantage of artificially reduced prices, to paraphrase, Government intervention is a gift! You would be stupid not to take advantage!! If, as a consumer, it is stupid not to take advantage of subsidized pricing, then, as a producer, it is stupid not to take advantage of government intervention in the form of privileges. (Read: "Trade Deficits and Fiat Currencies" and "Can Free Trade Ever Harm a Country?" by Ropert P. Murphy)
In fact, Thomas E. Woods Jr. admits in his book "Meltdown" that a failure to capitalize on government intervention, even as an Austrian, results in your own demise. Your savings will disappear and the cost of production will raise as a result of inflation and malinvestment, respectively. While the government intervention system exists, it is not wise to resist temptation and do the market thing. That would result in your own demise; a slow death being preferrable than a quick one where government intervention is concerned.
Are you saying that a natural monopoly rail system would create high prices? Why, it isn't in their favor to do so..... unless people are willing to pay for that high of a price... there are other ways of transportion besides the rail... in fact, if the rail company raises the price, other transportational services would decrease their price because demand would be willing to try their services... This would lead to lower prices of the rail company, if he wants to stay in business. In conclusion, most services have substitutes, so they still have competition..
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Prices don't need justification.
Wouldn't shippers just switch to trucks if the train charged too much?
Because of this option, I wouldn't think trains qualify as a monopoly.
The prospect of "monopoly" prices leads to the incentive to create the industry in the first place. We'd have far worse operating systems if microsoft had never been allowed to expand to 90% market share. Imagine if they brought the nail down on google. Imagine how many industries might go entirely undeveloped because innovators would not be able to market new technology to its maximum profitability.
They wouldn't be able to charge more than the market could bear.
They'd also be competing, although a little indirectly, with auto companies, aviation, bikes, our own two feet, and whatever else we can come up with.
"...given only one rail line..."
Why is this a given? It certainly contradicts history. The railroads competed fiercely with each other until the govt passed laws outlawing it [and thus ruining the railroads].
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Lyle:In fact, Thomas E. Woods Jr. admits in his book "Meltdown" that a failure to capitalize on government intervention, even as an Austrian, results in your own demise. Your savings will disappear and the cost of production will raise as a result of inflation and malinvestment, respectively. While the government intervention system exists, it is not wise to resist temptation and do the market thing. That would result in your own demise; a slow death being preferrable than a quick one where government intervention is concerned.
You want a good example of monopolized railroads and proof of it's inefficiency? Well look no further than Amtrak's 2009 Financial Report!
RESULTS OF OPERATIONS Amtrak reported a 2009 net loss of $1,264.4 million, compared to a 2008 net loss of $1,132.8 million, an increase of $131.6 million or 11.6%. During fiscal year 2009 Amtrak experienced a decrease in revenues and an increase in expenses as compared to fiscal year 2008.
Amtrak reported a 2009 net loss of $1,264.4 million, compared to a 2008 net loss of $1,132.8 million, an increase of $131.6 million or 11.6%. During fiscal year 2009 Amtrak experienced a decrease in revenues and an increase in expenses as compared to fiscal year 2008.
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His argument revolved around the fact that given only one rail line, any owner of the actual trains would be able to raise prices to a monopoly/superprofit price.
I have a monopoly on purple widgets, Toyota has a monopoly on Avalons, and the Wal Mart on my street has a monopoly on that one particular Star Wars toy that can be defined as different from all other Star Wars toys, McDonalds has a monopoly on Big Mac's. No one cares.
Oh yeah, and some "governmet" officials have a monopoly on taxation, education, law, and A -bombs, and the power to decide what should and should not be called a monopoly. The difference is, particularly in Western styled democracies, is they don't produce wealth by their own nature and govenment officials do not really feel the sting of failure the way an entrpeneur would, because governments are subsidized into existence.
Besides that, what determines the value of the object?
I have a monopoly on purple widgets, Toyota has a monopoly on Avalons, and the Wal Mart on my street has a monopoly on that one particular Star Wars toy that can be defined as different from all other Star Wars toys, McDonalds has a monopoly on Big Mac's.
I have a monopoly on myself and I charge monopoly prices. Janet Reno could have me for no small fortune.
Jason J:His argument revolved around the fact that given only one rail line, any owner of the actual trains would be able to raise prices to a monopoly/superprofit price. As no-one would be able to compete, and the chance of another line being built to the same place being slim, then it would not serve the community to have a free market in this situation. I gave him a speech about how the private company would increase capacity, modernise & generally cater more to customer expectations. But his point did strike home a little.
You should ask him to (try to) justify those assumptions. I personally see no reason to believe either of them.
Furthermore, as others have pointed out, there are other ways to get from point A to point B than by rail. Monopoly Rail Line can't make money from people who use other means of transportation.
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Jason J, "His argument revolved around the fact that given only one rail line, any owner of the actual trains would be able to raise prices to a monopoly/superprofit price." Allister Heath have already talk about Railtrack : the British Rail and the rail crash at Hatfield. I have some old (and very interesting !) documents, but not in english... But to tell you the truth, there is a (indirect) competition between railway and road.
"My question specifically relates to rail, but i believe it could be to other natural monopolies; How can we justify the higher prices that these monopolies charge using austrian economics?? " Have you ever heard of Harold Demsetz ? I'm just reading some of his works. Google it : "The Private Production of Public Goods" "Why Regulate Utilities ?"