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The problem that economists have with monopolies is not that the rents will fall into the hands of rapacious capitalists, rather than the off-spring of dead-beat parents.* Rather, the concern is essentially that monopolists will price at a level well above marginal costs, and thereby cause a cut-back in consumption from an efficient level. For example, say the marginal cost in terms of pavement damage of travelling from Yass to Goulburn is 50 cents per vehicle on average and there is no congestion, but the owner prices it at around $10 per trip. While many people will continue to use the road at this price, a number who would value the journey at more than the cost, but less than the price, will now have to detour or not drive at all. Leaving aside environmental exteralities etc, that spells a a welfare loss. One solution is for government to control the prices of the private owner; another is government ownership and pricing. Neither of these solutions is perfect, but let's explore where the alternative put forward by ABL and yourself - relying on competition and the price-mechanism - would get us. Let's keep it simple and assume that a prospective investor is considering building a rival road along the same route between Goulburn and Yass as the Hume, which is the most direct route. Firstly, the investor would realise that the existing road owner's construction costs are "sunk" and so, were price competition to ensue, it would (at the extreme) be willing to reduce its price right down to the 50 cents necessary to cover the marginal costs of road usage. At this price, the rival would be unable to recover its construction costs. Knowing this ahead of time would potentially deter entry the rival. However, let's say that the rival is confident that, either through collusion or enlightenned self-interest, it believes (at the other extreme) that the rival would eschew price competition after the new road is built and that the price would remain at $10 per trip, with the monopoly rents being maximised but split between the two road owners. If half of the monopoly rent from this route is sufficient to cover the costs of constructing the new road, the rival may proceed. But if so, what are we left with? A duopoly rather than a monopoly, no change in price, no increase in consumption, no increase in consumer welfare, but the wastage of half the monopoly rents on an unnecessary road. Again, that spells a welfare loss. ____ * In simple models, a dollar is a dollar and, from an aggregate utility perspective, it does not matter which member of society ends up with those dollars. That said, differing marginal utilities of money, equity considerations and the dead-weight costs of government taxation may mean that we would prefer a the dead-beat, or the Treasurer, to receive the monopoly rents rather than the rapacious capitalist.
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