Peter Z. Grossman
Chapter 2 questions the validity of the natural monopoly model as applied to electric power, and Chapters 3 and 4 suggest that the electric industry was not in need of a vast system of state and federal regulation because of a market failure problem. The question then is not why there is a national effort today for deregulation (or at least regulatory reform), but why it didn't happen earlier. Indeed, from the end of World War II through the 1960s, the system went largely unchallenged. According to the prevailing wisdom of the time, electric power was the paradigm natural monopoly and government regulation was needed to curb it. But if that premise was dubious (as it likely was), why did the system remain unquestioned for decades?
The simple answer to this question is that this system worked-well enough anyway. But more specifically, there were four reasons for the preservation and acceptance of the natural monopoly system. First, the regulated natural monopoly system functioned adequately under the particular circumstances of the post-war period; the lights generally stayed on and consumers could take affordable electric energy for granted. Second, it would have been costly to change; transition costs might well have led to net costs to social welfare. Third, path dependence made it difficult to see any alternative; few wanted to change because it had “always” been done this way. And finally, the real price of electricity was falling so no one felt especially disadvantaged and few would
The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry, Volume 7, pages 89-106.
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