by Walter Block
Recently by Walter Block: A Not So Funny Thing Happened to Me inTampa
Recently, I was sent this e-mail:
"I’ve never really seen a good answer to the question of how with utilities that have to run distribution lines (gas, electric or water) you can have unlimited competition. The land and easements they have to run over are extremely limited.”
I am asked this sort of question by students of mine, attendees of lectures I give and, not for the first time, via e mail. Rather than send a very brief answer to each person who asks this of me, I thought I would more systematically address this issue, and publish this on LewRockwell.com, where it can reach a wider audience.
I have a book length treatment of this query with regard to roads, available for free on the web, and at the Mises bookstore and Amazon. In this present short essay, I intend to give this a somewhat more narrow treatment than the book length treatment I have already given to roads, streets, highways and other vehicular thoroughfares.
I consider this the problem of "long thin things." It is a very vexing one. To the list furnished by the questioner ("gas, electric or water") I would add the following: sewer lines, telephone wires (before the advent of cell phones: I include this even though this problem has now been overtaken by technology since I want to demonstrate that libertarian property rights theory can solve all such problems, at all time periods, and does not rely upon modern technology), and roads and streets. I would even include things like postal delivery and garbage collection; although they are not “long and thin,” they are indeed a significant part of this challenge to the efficacy of free enterprise.
When you look at the problem ex post, or given that the homes, stores, and other such facilities are already built, then, I readily admit it, the problem is just about unsolvable. To get hundreds, let alone thousands of people to agree to any one provider for each of these things, gas, electricity, water, sewage, telephone, roads, postal delivery, garbage collection, etc., would be well nigh impossible. This is commonly referred to by economists as high transactions costs. It is hard enough to get five friends to agree to which restaurant and movie to patronize; this difficulty is far worse.
On the other hand, a system that allows competition in these services, with let us say on average a half dozen providers of each of these services would be wastefully duplicative. Can't you just imagine six different gas delivery firms, each with its own pipes, a dozen garbage pickup services, each with one twelfth of all the clients, or 10 separate lines on the telephone poles, let alone a telephone pole for each separate provider? This scenario boggles the mind, and convinces people that the free enterprise system might be all well and good in many industries, but not for this sort of thing.
However, when you look at the problem ex ante, before the buildings to be served are first constructed, the problem evaporates virtually entirely. We can then see that laissez faire capitalism is efficacious in the face of this challenge, as it is in all other such cases.
Consider a real estate developer with a few hundred acres at his disposal. He can do one of two things. First, build all the homes, stores, recreation centers, office towers, etc., that he intends to construct, worrying not at all about how any of these long thin things will serve his clients. He will allow the new owners to make contracts with all of those providers on their own accounts. Second, he will first contract with the firms that provide gas, electricity, water, sewage, telephone, roads, postal delivery, garbage collection, etc., one of each, and have all of these long thin things arranged before he digs his first foundation for any of the buildings. Then, he will sell the homes, factories, stores to their new owners, with a side order condition: they have to accept the providers of the long thin things with whom he has contracted. Is this "package deal" a permanent arrangement? No, of course not. The overall real estate developer may have had to enter into a contract of some duration, for example, three years, but, after that time if the new owners are not happy, for example, with the sewage service, or the mail delivery, they can, by a majority vote of all the condominium owners, change them, while entering into new contracts with satisfactory firms, for example, those providing road or water services.
It should by now be clear that the Adam Smithian "invisible hand" will lead construction firms to engage in precisely these sorts of condominium or collective arrangements, the second option. Who, after all, would want to purchase a house or store, knowing full well he would face the ex post challenge of very high transactions costs, or wasteful duplication? If the buildings were sold without this package deal, they would fetch a very low price on the market, if people would be willing to pay any positive price for them at all. On the other hand, if the homes as stores were sold as part of this package deal, where all of the long thin things were put into place beforehand, then a much higher price could be earned by the developer.
So, while this problem looks insuperable from the ex post point of view, it is a challenge to the free enterprise system that can easily be overcome when looked at ex ante.
