The Myth of Natural Monopoly

In a free market, it is impossible for monopolies to form without government intervention and regulation.

Dr. Thomas J. DiLorenzo provides us an epic lecture on “natural” monopolies.

It is a common myth perpetrated by statists that free markets in such industries as utilities, fuel, and others that have declining long run total costs, that natural monopolies will form in the market.  Thus requiring government “anti-trust” regulation or nationalization of industry to ensure a “fair” market is achieved.

Dr. DiLorenzo explains why this is a fallacy and demonstrates why the free market is the best mechanism to ensure consumers get affordable, high quality, “public” services.

Natural monopolies are impossible.

The Myth of Natural Monopoly
Thomas DiLorenzo, The Review of Austrian Economics Vol. 9,No. 2 (1996):
43-58

The very term “public utility”. ..is an absurd one. Every good is useful

“to the public,” and almost every good. . . may be considered “neces-

sary.” Any designation of a few industries as “public utilities” is

completely arbitrary and unjustified.

-Murray Rothbard, Power and Market

Most so-called public utilities have been granted governmen-

tal franchise monopolies because they are thought to be

“natural monopolies.” Put simply, a natural monopoly is said

to occur when production technology, such as relatively high fixed

costs, causes long-run average total costs to decline as output expands.

In such industries, the theory goes, a single producer will eventually

be able to produce at a lower cost than any two other producers,

thereby creating a “natural” monopoly. Higher prices will result if

more than one producer supplies the market.

Furthermore, competition is said to cause consumer inconven-

ience because of the construction of duplicative facilities, e.g., dig-

ging up the streets to put in dual gas or water lines. Avoiding such

inconveniences is another reason offered for government franchise

monopolies for industries with declining long-run average total

costs.

It is a myth that natural monopoly theory was developed first by

economists, and then used by legislators to “justify” franchise monop-

olies. The truth is that the monopolies were created decades before the

theory was formalized by intervention-minded economists, who then

used the theory as an ex post rationale for government intervention. At

the time when the first government franchise monopolies were being

granted, the large majority of economists understood that large-scale,

capital intensive production did not lead to monopoly, but was an ab-

solutely desirable aspect of the competitive process.

The word “processn is important here. If competition is viewed as

a dynamic, rivalrous process of entrepreneurship, then the fact that a

single producer happens to have the lowest costs at any one point in

time is of little or no consequence. The enduring forces of competi-

tion-including potential competition-will render free-market mo-

nopoly an impossibility.

The theory of natural monopoly is also a-historical. There is no evi-

dence of the “natural monopoly” story ever having been carried out-of

one producer achieving lower long-run average total costs than every-

one else in the industry and thereby establishing a permanent monop-

oly. As discussed below, in many of the so-called public utility indus-

tries of the late eighteenth and early nineteenth centuries, there were

often literally dozens of competitors.