Rakkur
It has often been said to me that public services are necessary because they prevent monopolies from coming into town, claiming up the most important resources which people survive upon, and then selling those goods at ridiculous prices or refusing to sell at all. These high prices and scarcity cause poverty and strife, and people must move out of the area to continue living. Therefore, the government must come in to provide these services to the public by claiming the resources, taxing everyone, and distributing the water to everyone fairly.
The most common story is this: a single water source for an entire village lies within the center of the village and is the most precious resource there. No other water sources are readily available, and surely no private individual can be trusted to own and profit from the well, or prices would be so high that no one could afford the water. Such conditions deem it necessary for the well to be publicly owned property instead of privately owned property.
My first analysis of the above scenario would involve this question: how is it that the private monopolist came to own the only well in the village? Surely, the first inhabits would have recognized the immense importance of the well and would have claimed it, among other necessities, first. No one moving there would ever consider doing so unless water was available, so the first land owners either gave out the water for free or charged prices which were bearable by the inhabitants who chose to move there.
Some, given the importance of contracts and the negotiation of treaties in a free society, might include an agreement with the well owner to be charged a certain price for a certain number of years. The contract may also negotiate some variable water price, not to exceed a certain price which would be found agreeable by all parties involved. So long as contracts are properly enforced, the well owner would then be unable to increase the water prices all at once sending the people into strife. Without these contracts and an assurance of water availability, fewer people would be likely to move to this village in the first place.
Therefore, it would be very likely that no potential monopolist could easily acquire the property of the well given that the well was first claimed by those who homesteaded, or first declared ownership of, the water source. Doing so would either require great cost, as the owners would be very unlikely to sell it for a small amount given it’s value and potentiality for profit, or it would require force. Theft would certainly be a way for a private individual to gain ownership of the well and then sell the water for very high prices, but theft is itself a violation of property rights. The well is not rightfully owned by the thief, and the very act of theft itself is a contradiction (e.g. the thief wants to steal the well but also wants others to not steal it from him). Theft is not voluntary and is, therefore, not market action.
Market actions are based on voluntary, contractual, and negotiated terms, so the new owner of the well is burdened with that initial cost when considering how much he can make through selling water to the people there. If the well cost him 5 million dollars, this cost makes the potential profitability of the well that much less. However, let’s assume that the individual is as dastardly as they come and was born from rich parents so that they don’t even care about the cost, and thus they decide to charge super high prices. Prices increase almost 10 fold overnight, and people wake up to the reality that their income is drastically reduced to their need for water in their survival.
Assuming that the water initially could be afforded by a household of 4 at a rate of 100$ a month, and that the new ownership demands 1000$ a month on those same families, we might initially suppose that the market has failed and monopolies can emerge due to free and voluntary actions. However, as time passes, it is very likely that other entrepreneurs will be eyeing the potential profit which they could be making. If we assume that the village is in the middle of the desert, the cost of trucking it in or flying it in may be very expensive. It might be that companies who attempt to do this can only bid the price of water down to 800$ per month given the large costs of transporting the heavy water, but that is still lower than the prices offered by the monopolist.
Keep in mind that profit can only accrue after costs are paid out, so companies who cannot make a profit because their costs would be greater than $1000 per month per family of 4 would not bother to bring water in. In this case, the $1000 would actually be the lowest price, given the real world conditions of the desert town.
Moreover, as time goes on and the initial costs are decreased, such as the cost of building an airport or making roads sturdy enough to hold tractor trailers, the costs may also come down. They can then bring prices down further to attract more clients, all while still making a profit. The monopolist, meanwhile, can only hope to profit so far as people choose to buy his product instead of the other water being brought to them from other sources, therefore he must continually lower his price to compete with the newcomers in order to have even a remote chance of retaining clients.
In a more realistic scenario such as a small village nearby a larger city, the monopolist is hindered in his price charging spree by the ability for people to drive elsewhere and attain other products. He is hindered by other companies agreeing to build large water towers and keep them constantly supplied. He is hindered by private companies selling his potential clients rain barrels and water purifiers, allowing them to collect their own water. He is hindered by any number of solutions thought up by people also seeking profit, wishing to sell their product to customers and enable them to attain their desires. The choice of individuals disallow a resource owner any dreams of unilaterally charging whatever they want at whatever profit imaginable. Prices are naturally bid down to their lowest possible level under a free market absent of government intrusion.
Even if prices for water remained permanently high for the individuals in a town, it is only because of the scarcity of the good being provided. It is natural that in some areas of the world there are fewer resources to harvest for our needs than in other locations. The cost of moving things to those remote locations is the same cost you experience when you have to pick up a table and move it into another room. It costs time, labor, and sometimes money or capital goods. Planes and trucks do not magically manifest themselves in our reality; the productive process is a time consuming one. It is necessarily true that the time spent on building a plane to bring water to a remote village could be spent on any number of other things.
People who build their homes in such remote locations need to be aware of that scarcity, and prices relate that information to them. Higher prices mean less availability; they indicate a shortage of resources in a particular area or of a particular good. Also, people are free to leave this village at any time; should they find prices unbearable in one area they can move to another. Once all the villagers have left, how could the monopolist hope to charge anyone for his resource, much less maintain high prices?
Besides, the alternative solution proposed, that a government should own the well and distribute water, certainly doesn’t pass the monopolist test. What is this government resource other than a monopoly of water distribution? What is to stop government from charging whatever price it would like, even if that price is more than the villagers can pay? What is to stop government from portioning out smaller amounts to the villagers and larger amounts to those who occupy the government or have political privilege? What is to stop the negligence of the government organization causing the well to fall into disrepair, possibly making it impossible to draw water from? What is to cause the water to be of a high quality, when the government will get it’s income through taxation regardless of the overall quality of the water? What would stop the government from refusing to give water to certain people who oppose that government, as has happened repeatedly in third world countries with governments starving out dissidents and rebels? What, in general, makes it less beneficial to have a private monopolist (who can only ask you to buy the product) than a public monopolist (who can force you to buy the product or be threatened with jail)?
What’s more is that everyone must pay for that water, regardless of whatever means available to the villagers made possible by other people who could bring water to them. Taxation hides the true cost being paid by individuals; it may be that cheaper alternatives would be available. Taxation makes it less likely that competition will emerge, as it’s much harder to convince someone to buy your product when your competitor is giving away the same good for free. Of course, it isn’t free at all: there is an implicit cost included in taxation which remains unseen to those who acquire that water.
When profits and prices are properly understood, it is revealed that the consumers vote on what is most important to them. They vote with their money when they choose to buy someone’s product instead of an inferior competitor’s product. They vote with their feet when they move their location within the vicinity of companies who offer lower prices and better quality. They vote with their voices when they tell their friends about the pleasurable experience they had with one company and denounce companies who have ripped them off or left them unsatisfied. They vote with their actions towards the election of companies who do the best job while denying the companies they dislike by refusing to finance them.
Companies can only profit when they offer lower prices or higher quality than their competition, and the same occurs even in areas where a resource is supposed to be monopolized. Prices and profits, along with property rights, are phenomena which offer the incentives which allocate resources in the most highly valued disposal of the consumers, you and I. By choosing to buy or refraining from purchase, we constantly send signals which are quantitatively aggregated through income and cost to the producers, effectively telling them what to produce, in what quantity, and at what quality given the scarcity of the goods and labor necessary to produce those goods. Profit is the creation of new goods and services; it increases the quantity available. The greater that prices are in one area, the more of an incentive for new producers to lower that price, bidding customers to their company and increasing their revenue.
This article on private ownership of water resources can easily be applied to all resources, and the fable of the greedy monopolist starving out the world is shown as the fallacy that it is.