The Economic Concept of Public Utility

8/14/2019 The Economic Concept of Public Utility

1/17

The Suntory and Toyota International Centres for Economics and Related Disciplines

The Economic Concept of a Public UtilityAuthor(s): H. E. BatsonSource: Economica, No. 42 (Nov., 1933), pp. 457-472Published by: Wileyon behalf of The London School of Economics and Political Scienceand The Suntory

and Toyota International Centres for Economics and Related DisciplinesStable URL: http://www.jstor.org/stable/2548908.

Accessed: 08/06/2013 01:40

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at.http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of

content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms

of scholarship. For more information about JSTOR, please contact [email protected].

.

Wiley, The London School of Economics and Political Science, The Suntory and Toyota International Centres

for Economics and Related Disciplinesare collaborating with JSTOR to digitize, preserve and extend access toEconomica.

http://www.jstor.org

This content downloaded from 103.10.154.1 on Sat, 8 Jun 201301:40:47 AMAll use subject to JSTOR Terms and Conditions
http://www.jstor.org/action/showPublisher?publisherCode=blackhttp://www.jstor.org/action/showPublisher?publisherCode=lonschoolhttp://www.jstor.org/action/showPublisher?publisherCode=suntoyhttp://www.jstor.org/action/showPublisher?publisherCode=suntoyhttp://www.jstor.org/stable/2548908?origin=JSTOR-pdfhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/stable/2548908?origin=JSTOR-pdfhttp://www.jstor.org/action/showPublisher?publisherCode=suntoyhttp://www.jstor.org/action/showPublisher?publisherCode=suntoyhttp://www.jstor.org/action/showPublisher?publisherCode=lonschoolhttp://www.jstor.org/action/showPublisher?publisherCode=black


2/17

I933]

The EconomicConceptof a PublicUtility'By H. E. BATSON

SOME justification may seem to be needed for my choice of asubject for this paper, since the term public utility in thestrictestsense cannot be considered to refer to an economicconcept at all. Primarily, public utility s whatever is definedas such by American statute law. The case fora concept of thiskind cannot be adjudicated by economists.But the term public utility is not restrictedto this legalmeaning. We meetit in official apers referringo English indus-tries,2 n which context the declarations of American law areobviously irrelevant. Behind the legislative concept of publicutilities ies in fact a political concept,whichmay be definedasthe idea that certain ndustriesneed special Governmentregula-tion. Even in America, an industrymiglhtbe a public utilityin this sense withoutbeing a public utility n law.But this political concept s in its turn based upon the idea thatthereare certain industries n which the ordinaryrestrictions findividualismare insufficiento ensure the appearance of satis-factorilyndividualisticresults.Thus one term s forced to do duty forthreerelated but quitedistinct concepts. When the law of Illinois says that the ownerof any propertywithin the State used for the production ofelectricity s a public utility, t is using the termin the fifst fthese senses. When the English Labour Party says that the ironand steel industries ught to be reorganised s public utilities,3tis using the term in the second or political sense. And whenProfessorGlaeser says, the worldover, public utilities are nowconsidered a thing apart fromothercommercialenterprises, 4 eseems to be using the term n the third or economic sense. It iswith the economic concept of public utilities that we are con-

1This paper was read, practically in its present form, at a meeting of theEconomic Club on February gth, 932.2 E.g., The Board of TradeJouynal upplement, October 6th, 1927.3 Election Programme,October 1931.4 Outlinesof Public UtilityEconomics,1927, p. 4.

457

This content downloaded from 103.10.154.1 on Sat, 8 Jun 201301:40:47 AMAll use subject toJSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp


3/17

458 ECONOMICA [NOVEMBERcerned his vening. t is themostfundamentalfthe three, ndif it shouldprove untenable,he case for he political nd legalconceptswould be seriouslyweakened.2. Ourpurpose hen s, n thefirst lace, to inquirewhethertis true hatcertain ndustriesiffern thisfundamentalconomicsensefromther ndustries. he bestway of answeringhis s totake the ndustrieshatare made egalpublicutilitiesnd see iftheyhaveany specialpeculiaritieshatmight xplain heir eingso legislated or.The differentmericanegislaturesave not been, nd arenotyet, perfectly greedabout the industrieswhichneed to belabelledpublicutilities; but there s sufficientgreementmongthem orus to be able to say:

i. The followingindsofenterprisere commonlyncludedwithin he copeofpublicutilityaws: railwaysnd tram-ways; postalservice ndertakings; elegraph,elephone,water,gas, and electricityndertakings; nd enterprisesauxiliary o these.1ii.Some legislatures efine s public utilities he industriescomposed fsuchenterprisess these nstead fthe enter-prises hemselves.Others efine he owners fthe enter-prises s publicutilities.Thesevariationsre unimportantas far s the economicsfthequestions concerned. t isonthe wholemost onveniento talk ofpublicutilitiessenterprises.

3. Let us proceed o ask what the specialcharacteristicsrethatdistinguishhesefrom ther nterprises.We certainlyhallnot find ufficientround ordistinctionnthecharacteristicsuggested y thename tself. Publicutilitiesshould, nthefaceof t, be enterprisesfpublicutility; butthiswillnotcarry s very ar. In thefirst lace,the deaofutilityothepublic s a veryvagueone that couldserve t thebest onlyfor istinctionsfdegree nd notfordistinctionsfkind.And nthe secondplace, however nd wherever e maydraw the linebetween nterpriseshat are useful o thepublicand enterprisesthatarenot,weshall find hatourfirst roupwill ncludemanyother ortsof undertakingshan those which we have listed.Clothes, read, nd housesare of at leastas muchpublicutilityas electricity,ram-rides,ndgrain-storagebuttailors, akeries,1Some legislatures nclude enterprisesof otherkinds, but the doubtfulcasesare not very numerous and to neglect them will endanger the validity of ourconclusions less than to add them to our list without a much longer criticalexamination thaii is here desirable.



4/17

I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 459and estate agencies re not usuallyreckonedmongpublicutili-ties. What characteristics it thatseparates he publicutilitiesfrom hese ther ndertakingshat re ust as useful o thepublic,but are notcalled publicutilities4. I fear hat we shall not find t possible o acceptthe tra-ditional nswer hatpublicutilitiesreundertakings hichupplynecessaries nder onditionsfmonopoly.Myreasons or hinkingthatweshallnotbeable to accept hisview,despite tsauthorita-tive recommendations,s twofold.In the first lace, we shall have somedifficultyn discoveringexactlywhat s meantby monopoly in this context.If it istobeunderstooditerally,s meaning exclusive ossessionf hetrade nsome ommodity,'1then t willnot be a truedescriptionofmanyoftheundertakingshat we have includedn our list.But ifweareto avoidthisdifficultyy understanding onopolyto mean anythinghortofperfect ompetition, hich s, Ithink, he sense nwhich heterm s generallysed in thiscon-nexion, henwe shallfind hatwe have merelyossedour theoryout ofthefrying-pannto thefire.Admittedlyhe doption f uch definition akes tquitetrueto saythatpublicutilities remonopolistic. ut it also makes tquitetrueto say that nearly very ther ortofundertakingsmonopolistic,oo. It might e possiblewith little ngenuityodivide he perfect-monopoly-perfect-competitionontinuumo asto segregate ublicutilities rom ll other ndustries ofpublicutility ; and then fthatpartofthecontinuumnwhich ublicutilitiesay were alledmonopolynd the restofthecontinuumcompetition,fcourse hemonopoly efinitionfpublicutiliticswould be freefrom hisparticular bjection.Nevertheless, eshould tillbe obliged o reject t.For ifwe definedmonopolyn thisdisingenuousashion,weshouldnot be able to proceedaccording -o he classical andmarginalistheories fmonopoly, hich re based on thehypo-thesisofone seller n a market. We shouldrequire theory fwhathas sometimesmisleadinglyeencalledduopoly, nd whatwoulddoubtless, ollowing . J.Becher, ave beenmore uitablycalled olyp5olyf thewordhadnotbeen ocacophonous.Andthistheory,which s one of thegreatest eedsofeconomics; whichwould, fproperlyonceived, overthewholefield fpricephe-nomena n a mannernotsupplementaryut complementaryotheorthodox heories fpurecompetitionnd pure monopoly;thistheoryhas hardlybeendeveloped t all, ifwe exceptthe1The Concise OxfordDictionary.



5/17

460 ECONOMICA [NOVEMBERpioneer work of Cournot, Edgeworth's elegant fragments, ndrecent essays by a Danish' and an American2author which wemustregardwith gratitude fnot with complete satisfaction. Ifwriters n public utilitiesdefine hem in this special sense of thetermmonopoly, henthey must explain them by thisspecial andas yetundeveloped branchoftheory. I know ofnobody who hasattemptedto do this.3And there s a more fundamentalobjection to this type of ex-planation. Our search for a definitionof a public utility is asearch for characteristicsof a definite ort. We do not simplywishto know what conceivable characteristics he utilitieshavein common, essential or accidental, relevant or irrelevant. Wewish to know what characteristicsthey have that attract theattention fthepolitician. A numberofcontributorso discussionson this subject failto observe thispointand thinkthat they havesolvedtheirproblemmerelyby propounding listofcommon har-acteristics fpublic utilitieswithouttroubling o inquirewhetherthese characteristics xplain anything. We ask themfor an ex-planationand theygiveus a description.A typical example is thetheorythat public utilitiesare transportundertakings; anotheris the theoryunder consideration-that they are monopolies. Ido not mean to say that if public utilitieswere all transportundertakings r all monopoliesthat would be a fact withoutanyrelevance at all for the question of State control; but I thinkthat it would have a derived and not an immediate relevance.This is even more true ifthe wordmonopoly s to be understoodin the special sensementionedabove rather than literally. Thereis no imaginablereason whythe fewnessof the sellers n a marketshould of itself alone demand Government nterference.Nobody ofcoursereally pretendsthat there s. What is reallyimplied s that whenthere are onlya fewsellers n a market, heyact in a manner that calls forGovernmentnterference. t is notmonopoly hatis objected to,but certainsupposedmanifestationsofmonopoly; and itis thesesupposedmanifestations fmonopolythat are the distinguishingharacteristics fpublic utilities.This criticismmightbe dismissed as an academic quibble if

1 F. Zeuthen: Problemsof Monopoly and Economic Warfare, 930.2 A. E. Monroe: Value and Income, 931.3 Since the above was written, everal books and articles bearing more or lessdirectly n this matterhave been published. By far thebest of these is Mrs. JoanRobinson's Economics of ImperfectCompetitionI933), but I do not thinkthateven this helps us much towards a solution of the problems discussed above,because I do not think that it starts from he rightdefinitions orthat purpose.I have brieflyouched upon my reasons for hinking his in an article n Scrutiny,September I933, and hope to be able to deal with the whole problem moreadequately in myforthcoming ork on Some EconomicAspectsof Public Utilities.



6/17

I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 46Iwhat I have calledthe distinguishingharacteristicsf publicutilitieswerealwaysfoundwherevermonopolywas found ndnever nywherelse. Then nstead fenumeratingr describingthe characteristics e mightby a sort of mental shorthanddescribe hem ollectivelys monopoly without ear f beingmisunderstoodvenby ourselves.Weshould imply e employinga common iguref peech.We talk,fornstance,fourobjectionto the tsetsefly s a cause ofsleeping icknesswhenwhat wereally bjectto is the trypanosomeshat t carries; butnobodythinks fquarrelling ith his.

Thisdefence reaksdown,however,nd theobjection easestobe a mere cademic uibble,f hethinghatwe reallymeantorefer o isnot an invariable oncomitantfthe thingwenameasits description.f,for nstance,hecausalagentofsleeping ick-nesswas notalwaysfoundn tsetse lies nd wassometimesoundinmosquitoesrfleas, hen twouldnot do to saythatthe causeof sleeping icknesswas thetsetsefly.Certainlyt wouldnot dojustto setout to annihilate hetsetse ly fwhatwe reallywantedto stampoutwas thetrypanosome.5. It issignificanthat ertainwriters, otably rofessor igou,have chosento distinguish ublic utilitiesnot as monopoliessimpliciter,ut as discriminatingonopolies.This step,whileseemingt firstight orender oid mostofthe above objectionsto theuse of thetermmonopoly,eally bandons hewhole asein its favour. It is the fact of discrimination,ot the fact ofmonopoly,hat s essential o theargument.I think hata studyoftheform ctually ssumedby publicutilityegislationwill suggestthat Professor igou is right nselectingthe endencyowardsdiscriminations the distinctivecharacteristicfpublic utilities; that s to say, I think hat ngenerall heprimary ause drivingegislatorso interfere ithpublic utilitieshas been a dissatisfaction iththe pricesthatwerebeing harged, rmore ftenwith heprices hatmight echarged.But I think hatProfessor igou is wrong n linkingthisup with he dea ofmonopoly. n strainingfter trypano-some he has swallowed totally uperfluoussetse ly. I callthisparticularsetse ly uperfluous,nthefirst lacebecause thinkI Dr. Hugh Dalton and ProfessorPlant have both asked if it is not true thatsome public utility egislation mightaim at the preventionofmerelyextortionatecharges, .e. ofchargeswhichgave an unusually large profit, ut were neverthelessnot differentiated. thinkthat the hypotheticalcase must be admitted; but Idoubt verymuchiftherehave been many actual cases in which the charges ofapublic utility endedto yieldabnormalprofits nd yetto remainundifferentiated.If such cases were the rule rather than the exception, public-utilityregulationwould have been a much simpleraffair han it is.



7/17

462 ECONOMICA [NOVEMBERthat discrimination s a much wider and more fundamentalphenomenon han monopoly,unless monopoly s so defined s toembrace all types of enterprise xcept the Stock Exchange andthe auctionroom,which s certainlynot the practice ofProfessorPigou. And I thinkthat it is wrong n the second place to treatdiscriminationn thepartofpublicutilities s a result ofsuchkindsofmonopolyas theydo enjoy.I have used the termdiscrimination, lthough I consider itratherout ofplace in a scientific iscussion. It is a term that hasno fixedmeaningat all. The onlysort of definition f t forwhichanysortofuniversality an be claimed s thatit meansundesirableforms fpricedifferentiation. ut what is undesirable n one caseis ofcoursenot necessarilyundesirable n others.'Let us provisionallydefine discrimination s the chargingofprices that vary among themselves where uniformitywould bepreferred.Uniform ricesare usuallyregardedas natural, butreally they are a highlyartificialphenomenon. The naturaltendency, f it is rightto talk of natural tendencies at all in asocial science,is towardsdifferentiatedrices. It is only wherepricesare held togetherby the artificialmechanism that we callthemarket that uniformitynsues,except ofcoursefortuitously.If,then,there s a stronger endencytowards discriminationnthe public-utility ndustries than in other industries of equalpublicutility,t is to be explainedbyreference o the forceswhichfixthe boundariesofmarkets. Anything hat will cause anybodyboth to desire and to be able to make two marketsexist whereonly one existed before will break down the safeguardsof uni-formity f prices.26. Let us assume, as is usual in discussionsof this sort aboutpricesand as best fitsthe facts,that the initiative n price-fixingis taken by the seller. Of course the conclusionsbuilt upon this

1I prefer o avoid usingtheword discrimination not so much because it isused ratherwidely in very different enses, although this is unfortunately hecase, but ratherbecause it generally mpliestwo notions that findno place in theabove argument,viz. (i) the notionof deliberateaction on the part ofthe seller(orwhoever s the immediatefixerofprices) and (2) the notion that such actionis morallyreprehensible, t least a priori. Moredetailed discussionofthe implica-tionsof the termand of the term differentiation must be deferred o anotheroccasion.2 It does not necessarilyfollowthat eitherparty to the bargain must deal inmore than one market. This is anotherreason forpreferring ot to use the worddiscrimination, which suggeststhat the same seller, or possibly buyer, dealsin morethan one market. It is possible to imaginea case in which a seller S sellsa commodityto a buyer B at a different rice fromthat charged by anotherseller S' to another buyer B'. I should call this a state of price-differentiationand consider t to come withinthe scope of a discussion ofpublic-utilityprices.But I do not thinkthat anybodywould call it a case ofdiscrimination.



8/17

1933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 463hypothesis an afterwards e appliedwtutatis utandiso caseswhere he buyer akes the nitiative.

Let us takefirst hecausesthat re ikely o make sellerwantto break downthe mechanism y which uniformityf priceswouldbe assured. The mostobviouscause need not detain uslong. The meredesire o make profitss large as possiblewillencourage imto chargemore han the averagepricewheneverhe canget t.' Most extbook iscussionsssume hat this lonesufficientlyxplains hephenomenonfdifferentiation.ut infact t doesnot.The scopeforprofitable ifferentiationouldusuallyremainverynarrowf twerenot for verhead osts.2 n fixing rices,seller s governed rimarily y therule ofaccepting o item ofbusinessthat willnot at least coverits costs. But cost in thiscontextmustbe interpretedo meantheexpense hatwouldbesavedif the businesswererefused,nd this differentialostmaybe much mallerhantheaverage ostofall the tems fbusinesstransacted.The discrepancys due to the existence f certaincostswhichmustbe coveredby the transactionsfthe under-taking s a whole, ut neednotbe covered y any particulartemofbusiness. The greater he proportionfthese overhead oststo the total costs, he greaterwillbe thegap betweenwhat omeitemsofbusinessmustbringnby themselves,ndwhat all theitemsmustbring n on an average; i.e. the greaterwill be theseller'smotive or harging ifferentiatedrices.Thephenomenonofoverhead ostsdeservesmoreattention han it usually gets.An adequate discussion f twould constitute completeheoryof production. do not proposeto enterupon thistask thisevening, ut one or two thingsneedto be said about the partplayedbyoverhead osts n thetheory fpublicutilities.i. Overhead hereis a purely elative erm.Practicallyllcosts rebothoverheadndprime, ccordingo theway nwhich he tem fbusiness r unitofproductions defined.

Costscan onlybe regarded s overheadwithreferenceospecific atchesofcommodities.ii.The batches f commoditiesorwhich articularostsareoverheadmaybe produced r soldsimultaneouslyrcon-secutively.Thus somecostsappearto be overhead t amoment ftime,others nlyovera periodoftime. Butfundamentallyoth are phenomenaof the same sort.1Whenever he can get it, that is, withoutincurring net loss.2 For more detailed discussionof this influenceof costs, see my Price PoliciesofGermainublic UtilityUsdertakiings,assim.



9/17

464 ECONOMICA [NOVEMBERFailure o observe hishas misledmanywriters n publicutilities, speciallywhen theyhave been dealing withdepreciationnd amortisation.iii. The logical elationshipetween he dea of overhead ostand the deaof oint cost appears o have been frequentlymisunderstood,n both sides of the Atlantic. I wouldprefer o tryto explain public utilitychargeswithoutreferenceo joint costs,butnot altogether or he reasonsgivenby Professorigou.iv. The occultationf overhead ostsby the derived onceptsof Increasing nd DecreasingReturns s in my opinionmischievous.t tends o substitute ormulaeor easoning.Increasingnddecreasingeturnsre notprimaryconomicconcepts.My objections not so much hat the boxesareemptys thatthey renotboxesat all, but the hadows fboxes.' The realitieswhich ast theseshadows re costs,and any theorywhich s not directly ased upon thesecosts s predestinedo inadequacy.7. Let us turn othe imitationspona seller's bility o chargedifferentiatedrices.2As Professor igouhas pointed ut,3thisdepends pontwothings-uponhispower o sellto somebuyersat a higher ricethan others repaying, ndupon hispower oprevent hemorefavoured ustomersrom e-sellingo thelessfavoured. n more echnical erms,tdepends ponhisability odo business n two or moreof a set of markets etweenwhichunits fsupply nd units fdemand re mperfectlyransferable.Thissortof solation f marketsmayresult romnyofthreedifferentonditionswhichwe maycall Fortuitous, ndesigned,and Intentional indranceso movement funits fdemand ndsupply.Thesetermswillrespectivelyesignate heprocesses ywhichmarkets re born solated,achieveunintended solationthroughhe action fgovernments,4rhaveitdeliberatelyhrust

uponthemby (orfor)dealers.Fortuitous imitation f transferabilityxists when unitsofdemand annotbe transferredxcept t a significantostfromdearer o a cheapermarket nd unitsofsupply annotbe trans-ferredxceptat a significantost from cheaperto a dearermarket, ndependentlyf specialhumanregulation.51 Vide the well-known ontroversy n The Economic Journal, 922 and I924.2 i.e. not merely o the limitationsupon a seller's ability to differentiatemonghis own charges, till ess to discriminate.3 Vide Economics of Welfare, rd edn., p. 275 if. 4 Or other authorities.6 The position of the line of demarcation between fortuitous nd undesignedlimitation of transferabilitydepends on the definition of special in this



10/17

I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 465Undesignedimitation f transferabilityxistswhere govern-ment r other uthority indersmovementn thisway, butnot

with heprimarybjectof facilitatingifferentiationf prices.Intentionalimitationftransferabilityxists where dealer(orauthority)sresponsibleor hehindrancesomovement, iththe ntentionf facilitating ifferentiationf prices.8. In thepublicutilityndustriesoth hedesire ndthe bilityof sellers o differentiates considerable, ecause the extentofoverhead osts nd the imitationso movement etweenmarketsarebothunusually reat. Thecausesofthis re argely f a tech-nical nature, ndcan onlybe summarisedere.Thechief auses of the argeproportionfoverhead ostsare:i. The technicalnecessity orplantof a typethat can beaddedto only n relativelyarge units.ii. The peculiarnatureof octopoid distributinglant.iii. The specialneed forreserve apacity.iv. The phenomena fthe peak, whichoftennecessitate

considerable luctuationsn the use made of differentsections f theundertaking. ut it is a mistake o treatthepeak as very mportantor ll publicutilities.Theprincipalonditions hich ermitsolation fmarkets re:i. Thephysical onditionsnderwhich heproducts fmostpublic tilitiesrenecessarily,r t leastmost onveniently,supplied.

ii.Thecomparativease ofcreatingntentional indrancesomovement etweenmarketsnthepartofcertain inds fgroups f customers.I do not thinkt appropriateo mention erethe limitationsomovement hichmaybe fosteredirectlyr ndirectlyy publicutility egulationtself,ince hese anhardly e reckonedmongthereasons or heexistence fthatregulation.1

9. This, then, s the basis ofthe economic onceptofpublicutilities. t is simplyhat there re certain ndustries hich avea tendency o chargediscriminating2ricesfortheirproducts.Thepolitical oncepts thatthe evilsofregulationfthese ndus-triesare outweighed y the evilsof leavingthemunregulated.This is not a matter hatwe, as economists,an cometo anyconclusionbout. All thatwecansay s (i)whetherhis endencysentence. But it is undesirable to attempt a full discussion of the theory ofindividualism n a footnote. Cp. note , p. 467.1 Some writersdo not appear to be troubled by this consideration.2 The word is used here, and later, in the sense mentioned n paragraph 5.



11/17

466 ECONOMICA [NOVEMBERis specially rominentn certain ndustries-i.e.whetherhere sa case for he economic oncept fa publicutility; (ii) whetherthe presence f thistendencywould cause certain nticipatedeffects; and (iii) whetherpreventive egulationwould causecertain nticipated ffects.But the balancingof these effects,and the decision hat the one outweighshe otherto such anextent hat regulations desirable; this s the political ase forthepublicutility oncept, nd one upon whichwe cannotpassjudgment.(i) The first uestion hlasalready been answeredwith reserva-tions n the affirmative; .e. it has been said that there s a groupof industries n which prices are noticeablymore differentiatedthan in other industries of like public importance. There is, ofcourse,no real qualitative difference ere, but the quantitativedifferences so greatas perhapsto warrant tsbeingregardedas adifferencef kind. The tendencyto differentiatedricingexistseverywhere; but only in certain ndustries s it extreme.The second and third questions,viz. those relating to the evilsof discrimination nd of regulationrespectively,do not strictlycomewithin hescope ofthispaper. But economics maybe calledinevidence,lthought is notthe udge.(ii) The chiefobjections hat are usuallyraisedagainst dis-criminationre:

(i) It is considered nfair o those customerswho pay thehigher rices.(2) When the customersoncernedre notfinal onsumersbut ndustrialndertakings,t is considered omodifynan undesirablemannerthe distributionf productiveresourcesnotherndustries.(3) It is considered o encourage ut-throat ompetition,whichs disliked ecause t isbelieved o have bad effectsoncontinuityndreliabilityf service nd to discourageinvestmenthatis sociallydesirable.

The firstwoobjections rebased on mereopinion.The lastalso involvesquestionsoffact,which cannot be settledby appealto historical vidence, s has been attempted y Sidgwick orexample,ndby esserwritersince. Publicutilitiesntheirwildstateare almost s extinct s the dodonowadays, nd thepre-history f theircaptivity s not over-well ocumented. Thedeductiveasefor he nevitabilityfcut-throatompetitionanbe made veryconvincing,s Professors lark and Davenportinter lia have shown; but onlyon the assumption hat the



12/17

I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 467managers fpublicutilitieswill act in that perfectlyompeti-tive mannerwhichnormallyppearsto be an almost xclusivespeciality f stockbrokers,eaver-huntingavages,and mathe-matical ymbols.But in anycase I do not considerhatquestions fcut-throatcompetitionre therealpoints t issue. Theyare notwhat egis-lationhas primarilyimedat, even ifsome theorists hink heyought o have been. In fact, s any studyof the Americanawreports nd the English tatutebook will show, he chief imofpublicutility egulation as beenthecontrol fprice-differentia-tion, r, fthe ess accurate erminologye preferred,hepreven-tionof discrimination. hetherhis s a desirable imor not isa purely olitical udgment.In consideringheseobjections o laissez-faire n the publicutility ndustries have deliberatelymittedmention fcertainarguments hat are very frequentlydvanced, but that arenot peculiarly elevant o public utilities.They are, in fact,objectionso laissez-fairengeneral.These socialistic bjections,as we maycall them odistinguishhem rom hosewhich o notinvolve rejectionfthe general hesis f ndividualism,'ncludethe following:

(i) The desirefor sociallydesirable services hat wouldnot be provided y unregulatedrivate nterprise,uchas unremunerativeus services, ransport t reducedfaresforworkmen, ostal services n country istricts,etc.2(2) The desirefortheprofitsf operation r of a share nthem, for herelief ftherates as it is often ttrac-tively hrased.Not necessarilyocialistic, ut socialisticn somecases,are thefollowing:(3) Thedesire okeeptheregulatedndustrymore pto datethanit would be underprivateenterprise.(4) The desireto ensurethe attraction f the sociallydesirable proportionf productive esourcesnto theindustry.

1 I do not believe that there is any thesis of individualismthat is universallyvalid. I think that particular actions can only be described as more or lessindividualisticin nature, not absolutely as individualistic or otherwise. And,therefore, do not think t possibleto conceive of a generalthesisof ndividual-ism or of socialism in the way in which a general thesis of anarchism or com-munismmightperhapsbe conceived. The above phrasemust therefore e under-stood to mean the generalthesisof ndividualismas this is commonly nterpretedin Europe and North America nowadays.2 i.e. discrimination, n some senses at least.



13/17

468 ECONOMICA [NOVEMBERI do notpropose o deal herewith uch motives. Theyformpartof hegeneral ase against ndividualism, ithwhich hecase

forpublicutilities, s I apprehendt, s incompatible.(iii) Whetherhe results fregulationrebetter rworse hanthose f aissez-fairenthepublicutilityndustriessalso a matterofpurely oliticaludgment,lthought maybe basedon conomicevidence.The chief bjections o regulation re:(i) Thatit tends o hinder rogressive anagement.(2) Thatitmaybe usedfor evying idden axeson certain

sections f thecommunity.(3) That tmay eadtotheestablishmentfunits fmanage-ment f anuneconomicalize.(4) That it opensthewayto undesirable olitical nfluenceon theconduct f ndustry.(5) That t does notreally emedyheevils hat t dealswith,butmerely ivesthem legalstatus.Perhaps the strongest rgument f all would referto whatdisciples fMarshallmight iketo call theexternal, ather hanto the nternal, iseconomiesfpublic ntervention.The evaluation fthese bjections, nd the comparisonfthemwith heobjectionsolaissez-faire,stheofficefthepolitician.IO. When the case forthe politicalconcepthas beensettled,thatfor he egalconcept fpublicutilitiesmaybe considered.tassumes hatcertain ndustriesre to be speciallydealtwithbytheGovernment,nd definesheway nwhich his s tobe done.It is a matter or he egislator, hoprincipallyas thechoicebe-tween ermittingndforbiddingrivate peration.Where rivateoperations permitted,tmaybe controlled s inAmerica rasinEngland, r, conceivably,n otherways. That is to say,thereareotherwaysofdealingwithpublicutilitiesnthepolitical ensethanby makinghem ublicutilitiesnthe egal ense.Therefore,ifwearespeakings legislators emay egitimatelyegard ublicownerships an alternativeo,and evenas theopposite f,publicutilitytatus. But ifwe arespeaking s politicians, e shall notregard hisas an accurateopposition.The oppositeof publicutility tatusas a political oncept s notpublic operation, utthe absenceof a needfor pecialregulation ltogether. he caseforthepoliticalconceptof a public utility s the case againstlaissez-fairen certainndustries,otthecase againstmunicipalownershipr anyotherform fspecialcontrol.

ii. I shouldike tthispoint oanticipatehepossible riticismthat this after ll is merely strife bout words, s so many



14/17

I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 469scientificiscussionsre, nd that fwanderingikeNewton longthe shore f the oceanof truthwe have happened o pickup amore nterestingebblethan ordinary,t doesnotmattermuchwhether ecallit a PublicUtility ran Oeffentlichenternehm-ungoranythinglse so long s we call it something.I am inclined o agreewiththe latterpart of thisstatement.But I think hat it wouldbe misapplied s a criticismf theprecedingrgument. do notthink hat all argumentseferringto mere definitionsnd other erbalquestions re necessarilyunimportant. sciencemaynot altogetherancifullyeregardedas nothingut a collectionfdefinitions.hat s tosay,one of heuseful hingshata science oes s to divide hings p intogroupsandgiveeach group symbol,hus aving good dealofwork orthosewho deal with hesethings fterwards. ut theprocess fclassifications quiteuseless fthegroups re nothomogeneous-homogeneous,hat is, when udged by criteria uitableto thepurposen hand.Now I wouldagreethatit does not matterverymuchwhatsymbols chosenforrepresentingparticular roup. I do notthink hat tis absolutely matter f ndifference,ecausewearenot the onlypeoplewhouse the anguagefromwhichwe usuallychoosethe symbols. In someways thisis a pity. Economicsmight void manydifficultiesf t tooka leaf out ofsome otherscientificooks and launcheda campaignof depopularisation,calling ts concepts ynumbers ike the stars,or by lettersikechemical lements,rbythesignsoftheZodiac; orat leastbystrangenewnamesthatdo not look likeordinarypeech, fterthemanner f ProfessorrvingFisher. Perhaps t is one of theminor aults f economics hat thas beentoo timid ninventingnewnames o fitnew deas. Certainlyt hasbeen rather nenter-prisingn accepting he giftof such an unsatisfactoryiece ofjargon as the term public utility.It is easy to seehowthe term ame intoexistence.For thosewho were oncerned ith hespecialregulationf certainndus-triesunder n individualisticegime, he public nterestn theindustries as naturallyheirmostremarkable, r at least theirmost advertisable, haracteristic. ut for the economist, hepublicutility fpublic utilitiess a matter f secondarympor-tance. For theeconomist,hepeculiar nd nterestinghingboutthem s their abitofdifferentialharging;and theterm publicutility failsutterlyo indicate his.

On theother and,wemust ememberhatthe term oesseemtohave the popular ar. We even meet t inHansard. It would



15/17

470 ECONOMICA [NOVEMBERbe futile orus to emulateCanuteand take to our arm-chairsagainst he ea ofusage. All theexisting iscussionsfthematterfrom he economic ointof viewuse the termpublicutilities.We even have-horribile diclu-textbooks and journalsand chairsof publicutility conomics. f generalusage insists hatthetermhas thismeaningwhen t already has two quite distincttechnicalmeaningsesides henon-technical,henwecan dolittleabout t. It certainly ouldbe verypleasant f economists adsufficientnfluenceo be able to makepeople gradually roptheword nthisconnectionndtalkaboutmulti-pricedommoditiesand multi-pricingndustries r something uite uniambiguouslike that nstead. Until heworld t large s disposed o do' his,it remains mootpointwhethert s worthwhile or s to do so inour private discussions. . . . But it is quite true that all thisis relatively nimportant.This,however, oes notmeanthatallmatters f nomenclatureare unimportant.t maynot matterwhatwecall a thing, ut wemustknowwheret belongs.Even the young adywhodid notmind whether he poet called her Lalage or Doris made thestipulation Onlycall me thine. In Johnsonianerminology,wemaytalk s otherpeopledo so long as we clear our minds fcant. It seems o methatthere s a hintof cant,for xample,ntheargumenthat coalmines rbanksordairy ombineshouldbemadepublicutilities. t seems ome hatnone f hese ossessesthefundamentalharacteristichatdistinguishesdmitted ublicutilities rom ther ndertakings,nd that he ttempto dealwiththem ndiscriminatelyorpurposes fgovernmentontrol houldbe resisted.To recapitulate, considerhatthisfundamentalharacteristicisanunusual endency owards rice-differentiation.here snota whitmore han this n the strict conomics fthe matter. Asecondary haracteristic,hich omewould ncluden the defini-tionoftheeconomic oncept utwhichsbetter eservedor hatofthe political oncept,s the propertyfbeingofconsiderableutility o the public. I do notmean that there s no tendencyoprice-differentiationlsewhere. t is a universal endency;but tisusually verruledyother endencies.Neither o I meanthatsome ndustriesre of no utilityo thepublic. Allthat mean sthatsome industries re commonly eckoned f greater ublicutility hanothers.Thus someofthe factors hatbear on the case foreventheeconomiconcept f a publicutility re indeterminater at leastvariable. Thiswill not appear surprisingf we reflecthat this



16/17

I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 47Icase mustultimately e expressed o as to answer ome suchquestion s: Wouldpublicutilitiesfuncontrolledxhibit esultssignificantlyifferentromheordinaryesults f ndividualismAnd the answer o thisdepends, f course, n what s meantbysignificant ifference and by ordinaryresult.

I2. The economic oncept f a publicutilitys bothnarrowerand morefundamentalhanthepolitical nd legal concepts.Itis more undamentalecausethe others rebasedupon t. It isnarrowerecause hey renotbased upon t alone. Theeconomicconcept ssertsthat certain ndustries ifferrom thers n aparticularway. The political oncept sserts hat because theyare thus different,heymustbe regulated.That is to say, thepolitical onceptmplies he additionalnotion hatthe evilsofregulationre less thanthe evilsof laissez-faires faras theseindustriesre concerned.And the legal conceptassertsthatbecause theyhave to be regulated, heyshall be calledpublicutilities nd subjectedto the treatment rescribed o publicutilitiesn certain tatutes. That is to say, the egal conceptm-plies thefurther otionthat the best way of regulatingheseindustriess that whichhas been adopted in America. Butwhetherhey reregulatednthisfashion rnot, .e. however hecasefor he egalconceptmaybe settled; and whetherrnot tis felt hattheyneedany special regulationt all, i.e. howeverthecasefor hepolitical onceptmaybe settled; the casefor heeconomic onceptremains, o be settledaccording o purelyeconomiccriteria.In consideringurverdictwe shall ask howfarthesuggesteddefinitions a true nd complete escriptionfall the ndustrieson our list; whethert relates to all the publicutilities ndnothing utthepublicutilities.Onesetofexceptions as already eenmentioned.De minimisnon curatex, nd some discriminatingndustriesreomittedmerely ecausetheir roducts rethoughto be so unimportantthat t doesnotmatter owthey harge or hem.Many orts fpersonal ervice all underthiscondemnation. he chargesforother ersonalervices,uch s those f herecognisedrofessions,are exempt rom overnmentegulation ecausetheyare regu-latedbythe ellershemselvesna waythatthepublicregardssacceptable. ftheydidnotthusregulate heir harges, oubtlesslawyers nd doctorswouldtake theirplace amongthe publicutilitieslongwithgasworksnd tramways.

Anotherorm fdifferentiation,herehemarketsreseparatedbynational oundaries,s notusuallyreckonedoputthe ndus-G



17/17

472 ECONOMICA [NOVEMBERtriespractisingt among he publicutilities ecausedumping s,by theverynature f the case, usually matter ver whichnosingle egislativeuthority as jurisdiction.One rather nomalous ase remainsforconsideration-retailtrade,other han thatofthe kinds lreadydiscussed.' Perhapsthis s excludedfrom ublic utility egulation ecause retailerspractise sortofself-regulationimilar o thatofthe professionsand theremaining rice-differencesreusuallynegligiblencom-parisonwith hedifficultiesfregulationrom utside.

I3. All this goes to expose the error f the notionthat theconcept of publicutilityhas a fixedconnotation.ProfessorGlaeserhas appliedto it an illuminatinghrase n describingtas a fixed onceptwith changing ontent.Manykindsofcir-cumstancemayconspireo createnewpublicutilities.Theymaybe created imply ya change nopinion. f,for xample,we allwentmad and decidedlike the Germans o regardoperaas anationalnecessity,2ome theatreswould become small-scalepublicutilities. Or theymay be createdby technical hanges,such s changes ausing n increasentheproportionfoverheadto prime osts. Or,since t is entrepreneurs'nd not socialcosts hatbearuponthismatter, conversionfprimentoover-head costsmight e brought boutby legislationlone. Again,newpublicutilitiesmight e created yanincreasen thefacilitiesfordealingn isolatedmarkets, hetherhiswas due topolicy raccident.Similarly, ny of the recognisedpublic utilitiesmightbeabolished y analogous hanges.Andsince thewhole ystem fpublicutility egulationsessentially patchon thecoat ofmanycolours hatwe call individualismny general iscardingfthatgarment ould, fcourse, o awaywith ublicutilitiesltogether.For it is importanto rememberhat thepublic utility onceptbynomeans overs ll casesofregulation.

1 i.e. other than in the railway, tramway, electricity, gas, water, postal,telegraph,telephone, and allied industries. 2 See note I, p. 458.

The Economic Concept of Public Utility

Documents

Transcript of The Economic Concept of Public Utility