Manitou Springs & Natural Monopolies: Give Me a Break

"The streets of Manitou Springs are twisty, narrow and steep, so why, city officials ask, should trucks from three waste haulers rumble down them every week, running the same routes with the wear-and-tear equivalent of 1,500 cars?"

It's a fair question. Trash hauling is one of those things that looks kind of like a public utility but is usually not. So to me, it is not clear as to whether it renders a greater benefit to society as a free-market, laissez-faire sort of good or as a natural-monopoly-type good. (I assume that natural monopolies exist and are mostly legitimate and best dealt with by the government; I believe this as an axiom that is as obvious and as logical as any Austrian-school tenet that we have learned about this semester)

So, let's analyze it: it's a homogenous good. It's a network-orientated good. And, since there's no real way to differentiate service in any meaningful way, and the good is mostly homogenous, it is subject to the phenomenon of confusopoly, which I have cited before as being an "group of companies with similar products who intentionally confuse customers instead of competing on price."

However, I will stop short of claiming that trash hauling is on par with other public utility-type goods, which, in addition to the characteristics above, is where the up-front costs of building and maintaining and growing infrastructure are so high that they render infeasible multiple, private providers.

So, I will call trash-hauling a "semi-natural monopoly" sort of good. Which means that I would subject it to a burden of proof for operating as private, laissez-faire that is higher than for goods such as iPods, but lower than for goods such as water or electricity.

So, how does this apply to Manitou Springs, and to any given city in general? Well, it means that I would probably favor trash hauling in its current status-quo form as a private, free-market good except under special circumstances where the costs to society and to the public are obviously far greater than the benefit of having private competition.

And does Manitou fit the bill of those special circumstances? Well, let's see.

Its roads are such that the typical private trash hauler cannot operate their usual fleet of trucks on them; it must have custom, smaller trucks. Also, the costs for maintaining the road infrastructure in Manitou are higher than they are in a typical city, and the road-to-person ratio is very low. And Manitou has less money to pay for its roads than the typical city, which is usually either much larger in size or which resides in a county that has a tax revenue that isn't a complete and total pittance (the property tax in El Paso County is 4 mills, one of the lowest in the nation by far).

So any given trash hauler operating there will probably not be operating very efficiently, since catering to Manitou necessitates special services and trucks to provide those services. And the more haulers that operate there, the more damage they will exert on the roads--the public infrastructure--by an order of magnitude more than each additional hauler would probably exert on a typical road system in a typical city. And also, each additional hauler of necessity decreases efficiencies across the spectrum, since with each one comes more back-tracking and redundancy of routes for multiple private companies doing the exact same thing: providing a completely (as close as you can get) homogenous good.

And due to confusopoly dynamics, the more fractured the market gets, the more costs will go up per customer in addition to the cost increases due to inefficiency in this micro-market. And finally, no private company will be especially suited to adapt to the special dynamics of Manitou unless they operate specifically and only in that market alone; something that does not apply to any of the three haulers currently operating there.

So, as far as I can tell, it easily meets the criteria for those special circumstances that would tell me that the net cost to society (and to individual customers) of having multiple haulers operate under the "free market" in Manitou is far greater than the cost of losing an artificial and meaningless "choice" of whichever hauler you choose as a customer.

Yet ignorant dolts are up in arms about it.

According to the article:

“I feel like I live in the United States and I have the freedom of choice and I won’t be told what to do,” said 78-year-old Anna Damm, a Springs Waste Systems customer.

She and others urged town officials to let a public referendum decide the single-hauler proposal.

Rick Johnson, also a Springs Waste customer, said, “It’s an issue of government kind of sticking it’s nose where it doesn’t belong and legislating intelligence.”

Yet with the new single-hauler system proposed, customers who currently use any hauler other than Bestway, the bidder for the single-hauler system, will save money and gain recycling. The city will get a $48, 000 lump sum payment every year to help with repairing the roads, which will experience far less wear than they did before. And residents won't have to deal with the constant roar of trucks coming throughout the week to do the exact same thing under the veil of "competition."

Yet still people complain because this is just another example of that pesky Manitou Council trying to "impose its socialist agenda" on the helpless citizenry.

Give me a break. The single-hauler system in Manitou makes so much sense.

Spillover Effect

As millions of gallons of oil choke the waters, wildlife and livelihoods of Louisiana, Mississippi, Alabama and Florida, armchair economists wade through the muck of deceit that parties involved share with the news media, in order to gauge the "true" costs of this ecological nightmare. As Austrian economists, we immediately wonder who pays which costs.

Environmental catastrophes, such as the exploratory oil rig spill in the Gulf of Mexico, present an opportunity for neoclassical economists to discuss the "negative externalities" inherent to fossil fuel consumption. Generally speaking, externalities represent the costs to those who were not contracting parties to an exchange - the costs to society which are not reflected in the price of the good or service consumed. In the case of Transocean's Deepwater Horizon exploratory rig, the negative externalities of oily water and air pollution associated with the spill and cleanup result in closed shipping lanes, lost tourism and grounded commercial fishing fleets to name just a few costs. There are those who look to our Uncle Sam to stem the flow of crude from reaching America's fragile coastline, and with good reason. Thanks to public mandate and finances, the U.S. Coast Guard is the most capable emergency responder in this instance. So who pays?

In order to "internalize" the externality - to create a neoclassically efficient outcome - a price must be put on the extraction of crude oil to offset the harmful consequences that such spills can cause. Yet government regulations, created by women and men in tidy offices in a faraway city who entertain the advocates of the petroleum industry, never solve the "problem," that is, unwanted spillover of oil into ocean water, without creating a new unintended consequence - most likely in the form of mandated controls and redundant safety equipment which consumers will fund through their gasoline purchases.

Perhaps a less forceful, more sensible approach to the remedy for this disaster has already begun. As a primary party to the accident, British Petroleum will spend over $100 million for the resultant cleanup. The degree to which BP and Transocean are at fault for causing damage to fishing, tourism and commercial shipping should be determined by courts of law. Parties hurt by the spill can seek damages in a well-functioning civil court system. The question of who pays and how much revolves around the issue of who has the property right to what, an issue most effectively settled by the judicial system. Ship owners, shrimpers, even beach combers all have a potential claim against the offending parties. As a result, the oil rig owner and the petroleum refiner may incur enormous costs to satisfy the plaintiffs. As it should be. Only limited liability and government protection stand in the way of justice being served.

One possible extension of the application of property rights to help determine how cleanup costs shall be determined is government claiming domain over the coastal waters, if citizens mandate that government regulate what may not be put into coastal waters. Regardless of whether The Force or individual parties have rights to unspoiled ocean water, I hope that the bill for damages presented to BP and Transocean is thorough and memorable.

Economic Models Ill Prepared for Foreign Innovation

Economic models have long been based on the assumption that there is an optimal level of efficiency in the production processes of goods and services. Businesses make inventory as well as research and development decisions based on these models. As is often discussed in class, these models do not take entrepreneurship (i.e., innovation) into account. As a result, we are seeing the companies who have built their businesses on these models being left behind and some of the deficiencies of the models are brought to light.
A recent article in the economist points out that emerging, developing companies that were once simply a source of cheap labor, are now becoming a leading source of innovation. Much of this innovation is due to the fact that these countries are not allowing themselves to be bound by the parameters of the model and are testing new methods of production, delivery and inventory. One example cited in the article is about how Japan surpassed American auto makers in the early 1980s. This was accomplished by a new system of making things that the Japanese invented called "lean manufacturing." The importance of this process is a conceptual one. The Japanese did not continue to try and find ways to increase efficiency within the model, as that would only allow for a certain (optimal) level of efficiency to be attained. According to the model, once that level or equilibrium is reached, there is no reason to search for a better way to do things because you have reached the point that marginal output will begin to decrease. Therefore, the Japanese disregarded the model in a sense and the results of willingness to try something new was increased market share and greater profits.
In emerging markets worldwide, they are experminenting with new business models. This trial and error approach is allowing these countries to not limit themselves to predetermined outputs and in some cases, they are now producing more than the classic model predicted they could produce. This level of innovation is also challenging in terms of who can enter into different markets and produce a quality product. Innovation not only spurs competition in the sense that better, cheaper products appear in the marketplace, but also in the sense that barriers of entry can be lowered or in some cases, sidestepped altogether. This can happen when there are barriers of entry in the production of one product but innovation leads to the invention of a comparable good that may have different or lower barriers of entry that make entry more accessible to more people. As this happens, the numbers of companies in these emerging companies grows. More companies generally means more capital. A line chart in the Economist article shows that GDP growth in emerging markets has outpaced that of GDP growth in the U.S. since the year 2000. What this demonstrates, I believe, is that many of the classic models inhibit creativity and in many ways, growth. The models therefore become somewhat self-fulfilling in the sense that since there is no account of entrepreneurship, it can inhibit this type of activity. One who believes in and works within the model will not see the options of innovation or trial and error. Those who look beyond the models are the ones utilizing their creativity and are rewarded these days with higher growth rates.