EKIP– Expert Club for Economics and Politics A Different Opinion
Nowadays, humanity has become accustomed to many conveniences that our ancestors could not take advantage of. The car, the television, the refrigerator, the dishwasher are just a small part of the goods that make our lives better. The standard we enjoy today is due to more efficient modern methods of production, which would not be possible without energy.
The reduction of human power in production, through its replacement by machines powered by some form of energy, is a watershed event that leads to a vast improvement in our lives. Without energy, mass production would not exist, and poverty would remain the only condition known to humanity.
But if energy is so important, the question arises why we would want the state to have any interference in it? The state is famous as a bad manager, whose management leads to decline rather than improvement. The most obvious example is the socialist economic system, where the state manages all production processes, but instead of the promised abundance, there is a shortage of even the most basic goods. If it is true that the state cannot rationally manage an entire economy, why should we expect it to be able to manage just one or another economic sector?
The most common argument against the withdrawal of state intervention in energy - that is, energy production should be carried out by competing private entrepreneurs - is that this sector is of strategic importance and "cannot be left to the whims of the market". But the importance of energy does not justify its monopolization by the state, quite the opposite. If the relative importance of a given sector was the necessary and sufficient condition for its takeover by the state, why do we let the market produce food? Because we have recognized that it can be relied on to deliver more goods, of higher quality and at a lower price. And declaring a certain sector as "strategic" or "structurally determining" is another trick of politicians and their friends to control it - the situation is similar with agriculture, mining, etc.
Yet, the reality today is that almost everywhere in the world the state is heavily involved in the energy sector. In some places its control extends only to production, in others to distribution, and in still others it is total.
It is argued that energy cannot be privatized (at least not entirely) because it is a natural monopoly and its product is a public good. A natural monopoly is an industry that requires very high initial investment costs, which in most cases leads to the emergence of only one producer in a given geographical area. Hence the assumption is that the sole producer will abuse its position by constantly raising the price of its product. Therefore, it would be preferable for the state to offer this product.
But things are a little different. In fact, if the state has not erected barriers to entry into the sector, even if there is only one producer, his desire to sell at the highest possible price will be limited by the threat that another entrepreneur who wants to have the same profit as him will be attracted to this industry (higher profitability will justify higher investment costs). Competition is what ensures that no particular producer abuses his position through high prices or low quality.
The most typical example of destructive state energy policy is the imposition of price controls that disrupt the balance between energy supply and demand. In most cases, this control takes the form of a price ceiling (or artificial price reduction), which leads to serious negative consequences.
By imposing a price that is lower than the market price, the state limits the profitability of the sector, which leads to less energy production. On the one hand, the artificially low price stimulates consumers to increase their energy consumption, and on the other hand, it prevents producers from increasing their production. As a result, producers' costs increase, but since the price ceiling does not allow them to increase the final price of the product, they begin to accumulate losses. Ultimately, existing energy producers are threatened with bankruptcy, and the sector becomes unattractive for new players to enter - the amount of energy produced decreases and its price increases.
If we want a stable energy system, we must leave it to the regulating forces of market competition and tear it away from the state. The free market works equally well in shoemaking as it does in energy production, everything else is dogmatism.
I support the idea of liberalizing the electricity market, but the article is full of logical errors. There are also many economic errors, especially in the arguments in defense of private monopoly. Is it so difficult to defend your thesis with serious arguments?
Point out any errors. Furthermore, no meaningful arguments can be made for any monopoly.
What is the purpose of the article? If the idea is to defend a given thesis before people with different economic and political views, shouldn't one start from a common axiom base? The state is known as a bad manager only among those who think like you and do not need convincing. The "most obvious example" is neither obvious (to those who think differently) nor is it an example (it is rather an abstract generalization). Also, if we assume that the state really "cannot manage an entire economy in a rational way", how does it follow that it cannot manage one or another economic sector? - A typical example of a logical fallacy of inheritance.
Electricity as a primary raw material is of strategic importance, but the food market and the electricity market are fundamentally different and a comparison between the two is inappropriate - self-regulation in the former is achieved thanks to sufficiently developed competition at all levels, while in the latter there is no such competition, both for economic and purely technical reasons.
How, in the case of a single producer (monopolist), will the threat "that another entrepreneur who wants to have the same profit as him be attracted to this industry" guarantee an optimal market price for electricity? The price that stops the emergence of competition is higher than the best price for the consumer (the equilibrium price in the case of a developed competitive market), and the low elasticity of demand allows the producer to set exactly that price, instead of a lower one.
The state is known as a bad manager because it cannot calculate. There is no profit and loss mechanism in it, because at any moment a given activity can be subsidized, and in most cases the profits (if any) are absorbed by the bureaucracy, and the losses are socialized, i.e. distributed over the entire population. If we assume that we normally earn 100 BGN per year from a given asset and its life is 10 years, then if we ignore time preferences, the asset costs 1000 BGN, but since those working in the state sector are there temporarily, they will have an incentive to explode it as much as possible and will not keep it because they will not receive the full value of the asset during their term. Along with the problem with incentives in the system, economic calculation is also very difficult, especially in such a long-term process as energy, where several phases are passed to reach the final product. A lot can be written about how bad a manager the state is, but the easiest thing to do is look around you.
The example of the food and energy market is bad for your thesis. On the contrary, the two most regulated sectors in the EU are Energy and the food industry, which are also the most subsidized.
On the issue of monopoly and competitive price, I'm interested in how you differentiate them, because by definition above the monopoly price, the demand curve is elastic, below it it is inelastic; by definition the curve above the so-called competitive price is also elastic. So how do we distinguish them, how do we understand whether we have gone from subcompetitive to competitive or from competitive to monopoly price. The truth is that there is no way. There is a regulated and a free price.