Natural Monopoly and Its Regulation

Natural Monopoly and Its Regulation

Natural Monopoly and Its Regulation

Natural Monopoly and Its Regulation


"Thirty years ago a young assistant professor named Richard Posner asked the question of whether the existence of natural monopoly provides adequate justification for government intervention. His answer was no. The evils of natural monopoly are exaggerated, the effectiveness of regulation in controlling them is highly questionable, and regulation costs a great deal. Thirty years after its initial publication, read the original insights of Richard Posner about the regulation of natural monopoly as well as a new preface in which Posner reflects on the deregulation of industries that has occurred since 1969 and the possibilities for more deregulation in the future." Title Summary field provided by Blackwell North America, Inc. All Rights Reserved


It is a curious experience to reread an article that one wrote thirty years ago. Not that this is the first time I have reread [Natural Monopoly and Its Regulation.] I am sure I reread it from time to time in the five years or so after it was published, when I was writing extensively on regulated industries. But it has probably been at least a quarter of a century since I looked at the article.

What struck me most forcibly in rereading it while composing this foreword to the republished article is how tame it now seems. I imagine that most lawyers and economists reading it today would find nothing very startling in it, whether or not they accepted its bold thesis that public utility and common carrier regulation are more trouble than they are worth even in the diminishing number of industries that have pronounced natural-monopoly characteristics, that is, in which average costs decline over so large a range of outputs that a single firm would have a big cost advantage over multiple firms serving the same market.

But in 1969 not only the thesis but also much of the analysis was distinctly heterodox. Not that there wasn't even then a large literature in economics and in law that was critical of the operation of public utility and common carrier regulation. But the focus of this literature was on ways of improving the operation of the regulatory process to make it a more effective constraint on monopoly pricing, predatory pricing, and other supposed dangers of unregulated monopoly. It was not on deregulation, a term rarely used back then and a concept that was not on the policy agenda. The emphasis on reforming rather than abolishing regulation reflected the fact that most economists and lawyers had considerable faith in government—and considerable

These are essentially synonymous. The term [public utility] tends to be used in
power industries and the term [common carrier] in transportation and communica
tions. Somewhat similar controls are (diminishingly) found in financial services in
dustries, primarily banking, but under different names.

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