“Natural” Monopoly Definition: Situation where it makes sense for only one business to provide a good or service, usually because the cost of starting.

“Natural” Monopoly• Definition: Situation where it

makes sense for only one business to provide a good or service, usually because the cost of starting up the business is very high. Prices are regulated by the government.

• Examples: UTILITIES: electricity companies, water, sewers/waste management

If Competition Were Allowed?• There would be too many

power lines, sewer systems, water lines all over the place.

• Difficult or impossible for a consumer to switch to another company

Broomfield Water Treatment Facility

Why Don’t They Raise The Price?

• How It Works:•

Cannot raise their prices without approval by the Colorado state Public Utilities Commission (PUC)—a part of the state government

• PUC allows them to make a certain percent in profit.

Problems With Monopolies

• No competition, so no incentive to:• Innovate (come up with new products)

• Provide good service

• Change what they’re doing

Colorado Amendment 37• Passed in 2004:• 52% to 48%

• Requires mid-size to large Colorado power companies to produce 10% of their electricity from renewable resources such as wind, solar, hydroelectric by 2015

Public Goods• Goods and services that are provided by the government

for various reasons:• It would be non-profitable• It would not be safe• The market wouldn’t provide the good equitably (fairly)

• Textbook definition:• Non-excludability (you can’t keep non-payers from

using it)• The cost of adding new users doesn’t change the cost

of production

4. Non-profitability

Examples:

• Army• Large hydroelectric

dam• Roads

• National Parks• Some types of R &

D (research and development)

Why the Market Doesn’t Provide It

• Dangerous! (and non-profitable)• Too expensive

• Inefficient use of land (competing roads), expensive (and fairness)

• Non-profitable• Non-profitable (fracking

technology was developed by federal government research)

Possible Solutions• Have government provide these

goods and servicesProblems?

Government doesn’t have incentive to save money: they are using tax dollars

Lack of competition leads to inefficiency, poor quality

Allow governments to build it, let private companies run/maintain it.

Problem: private business gets the profit without paying the cost

5. Equity / Fairness

• What goods and services should everyone have equally?

• What should everyone have at least minimum access to?

• What goods/services would improve our country (maximize the societal benefit) if everyone had access to them (and thus provided with tax dollars)?

Fairness • Should electricity be a public good? • Internet access? • Public roads?• Public parks and playgrounds?• Post office?• Health care?• Public education?

What if all people had /

didn’t have these services?

Post Office Closings

How Does Public Education Help Society?

• Educated population necessary for democracy

• Educated workforce more productive than non-educated

• Education leads to higher pay: people spend more money to keep economy going

• What would be the cost to society of a large uneducated lower class?

What If Public Goods Were Left to Market Forces?

• Public goods and services that are currently available to everyone equally would become something you have to pay for

• Not all people could pay• Services would not be available where not profitable (especially rural communities, poor neighborhoods)

Private Schools

Holy Family

• Tuition for the 2012-2013 school year is $8,300 for Catholics who are recognized and registered members of a Catholic parish; $9,600 for non-Catholics and for Catholics who are not registered members of a Catholic parish.

• Holy Family awarded over $800,000 in tuition assistance and scholarships for the 2012-2013 school year.

Public Goods Trade-Off

•Gain some equity/fairness and stability

•Lose some economic freedom, efficiency, innovation