No. of Recommendations: 13
Gassendi wrote:

Anyway, you're right about the central issue, the postal service does have a sort of monopoly. The interested reader can find the details here: (http://new.usps.com/cpim/ftp/pubs/pub542.pdf) and I wouldn't want to defend such a monopoly. (Perhaps it's defensible; it just isn't defensible on first look, and that's all I've taken.)

Well, let's not mince words - the Post Office does have a monopoly on the delivery of first- and third-class mail. However, there is an articulable defense for such monopoly. Whether you find it compelling is another story. In a nutshell, there are two prongs: i) the maintenance of the USPS monopoly is good because provision of uniform subsidized mail service (particularly to remote areas) produces positive externalities that would be underproduced by a competitive market; and ii) provision of conventional mail services lends itself to "natural monopolies" in smaller markets.

The USPS does not operate its enterprise in order to maximize profits, as would a conventional monopolist. Costs of mail carriage between densely populated centers are vastly lower than between more sparsely populated areas. A profit-maximizing monopolist would quickly either raise rates for rural areas or abandon such routes altogether. Such a monopolist would use its market power to generate higher profits. By contrast, the USPS uses much of the extraordinary profit extracted under its legislatively ordained market power to subsidize unprofitable routes at the expense of profitable ones.

The effect of this exercise of monopolistic market power is to create a uniform, universal postal service that deviates from the pure equilibrium outcome (cheap city mail, expensive rural mail). To the extent that it deviates from the equilibrium, it is inefficient. However, uniform and universal postal service creates positive externalities:

1) By subsidizing rural delivery, the mail monopoly promotes population dispersion. Essentially, subsidized mail provides an economic incentive to live in more rural areas, and a disincentive to urban areas. Less important in modern times, it was at one time profoundly critical for the government to encourage the settlement of vast tracts of currently unpopulated lands. Simply put, vast unoccupied ares were deemed detrimental to the welfare of the nation, posing a national security risk as well as impeding effective communication and administration between the more populated areas. Laws such as the Homestead Act of 1862 were intended to promote settlement of these areas by providing economic incentives to anyone willing to claim and cultivate these lands.

The frontier may have been tamed, but there are still collective security benefits to maintaining a rural populace. In addition to having "eyes on the border," rural populations help provide and maintain infrastructure across wide areas of the country. This infrastructure can provide economic externalities as well. Finally, there are some activities (notably agriculture) that require large open tracts of land, and therefore a sparse population. Since many of these activities are deemed important to national security, providing for them through a postal subsidy (rather than direct transfer) may actually be more efficient.

Additionally, there are the positive economic externalities by having a uniform mail system. Because mail carriage is uniform and universal, individual economic actors are spared certain transaction costs. In a privatized world, prior to mailing a letter you would have to figure out which commerical carriers served the recipient, and determine what their rates were. Although such costs may individually be small, collectively they can accumulate. A uniform standard avoids these transaction costs.

Before hearing from the laissez-faire crowd, there is precedent for uniform governmental action to avoid transaction costs. At one level, there is no particular need for civil enforcement of contractual obligations, or to call upon the power of the state for routine economic matters. Parties could always negotiate for whatever security arrangements they deemed necessary to ensure performance under contracts, whether in the form of mutual deposits, accredited third-parties, or what-not. However, having to provide for these security arrangements each and every time is vastly inefficient. It is far more efficient to have a regulatory system whereby contracts are enforceable, and incur transaction costs only in rare(ish) occasions of breach.

2) By providing direct service, the government may avoid private natural monopolies. When you have a small enough market, economic actors are no longer "price takers" and begin to exercise monopolistic market power. For services that are classically regarded as utilities, this threshold population of market failure can actually be rather high, since there are typically few substitutes. For example, the only restaurant in town might be limited in how much it can charge, since people can always cook at home - the water company faces a different situation.

For many small towns, the population may not be large enough to support multiple mail carriers. Since mail service has few practical substitutes, an unregulated mail market may create numerous instances of market failure. Moreover, unlike recently deregulated utilities such as telecommunications and power provisions, the high "fixed" costs creating the natural monopoly are not physical infrastructural improvements (which can then be shared/pooled among competitors). Rather, the fixed costs are constantly recurring transportation costs - the first mail truck or plane into an area is the analogous "fixed" costs to the electrical wire, but it is a recurring cost. It may cost less to simply provide the service as a public enterprise than to regulate.


Whew - way too long. Sorry. Anyway, I am not claiming that the economic benefits associated with the two externalities described above are greater than the economic detriments associated with the inefficiency of the monopolistic postal service. Rather, there are economic benefits to the monopoly that need to be considered in making that evaluation. It is even possible that these economic benefits are somehow empirically "greater" than the economic benefits that would arise from a competitive mail market - although I doubt that such comparisons are possible, since there are clear groups of winners and losers. Comparisons of utility across different groups are difficult. It is entirely possible that the current system is Pareto-efficient, given the enormous transaction costs that would be involved in replicating the current economic distribution within a freely competitive market. But that's a discussion for another post....

Albaby
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