Living in a Second-Best World
Attention, all shoppers! A
marvelous new marketplace is opening its doors. Soon, thanks to the next great
wave of deregulation due to arrive in neighborhoods across the nation, you will
be able to haggle over your electricity rates. What's that you say? You are not
thrilled at the prospect of a new bunch of utility companies calling you at
dinner time to offer you their special one-time-only package of cut-rate prices
for customers who turn on their air conditioning only after 8 p.m., never run
the clothes dryer except between 10 a.m. and noon, and use only fluorescent
bulbs?
Are you
worried, perhaps, that, when most of your neighbors are buying their kilowatts
from elsewhere, your local utility will no longer gladly send crews to restore
your power in an ice storm? Or that competing electricity producers won't
invest in cleaner generators--or that they will switch to the cheapest and
dirtiest coal they can find? Or that average prices won't really fall after
they've paid for all the new executives and middlemen and advertising
copywriters and telemarketers they will need in order to compete?
If you're suffering such qualms, you're probably the sort
of person who doesn't appreciate the ample benefits telephone and airline
deregulation have brought.
You're
someone who still thinks it wouldn't be such an awful thing to have a single
phone company reaching from coast to coast, because it means you need only one
phone card to call anywhere in the country, who would willingly relinquish
exciting new features such as dialing 11 extra digits in order to protect
yourself against "surprise charges" by "no name" telephone companies (a fun
service my local carrier recently introduced). You would just as soon avoid all
those arguments about being "slammed" for charges by a phone company you didn't
choose or being "crammed" for special services you didn't order.
You're also probably one of those people who
needs to make flight reservations at the last moment, who has better things to
do than search the Internet for bargain rates, and hates feeling the person
next to you paid only half as much for a ticket. You long for leg room and
semi-edible meals in coach class. You remember when confirmed reservations
meant the airline would a) hold your seat and b) feel obliged to find you a
substitute--on another carrier if necessary--if, for some reason, your flight
didn't take off.
In other
words, you're someone like me. What's the matter with us? Surely we know, from
both economic theory and concrete example, that open competition is the best
assurance of consumer satisfaction. Companies shielded from market pressures by
monopoly position or government intervention grow fat, lazy, and indifferent to
their customers. Why are we so dubious about the benefits that freely competing
telephone companies and airlines shower upon us?
Well, partly it's because the world keeps offering us more
and more choices--except the choice of lengthening the day. We've already got
our hands full doing our jobs and caring for our families and shopping for the
everyday things of life in malls and catalogs and now the Internet. We are not
wrong to suspect that many of the corporate efficiency gains the economists
extol come at the (usually uncounted) expense of our own time and convenience.
When airlines overbook to minimize the chance they might fly with empty seats,
the value of the hours we waste doesn't get counted in their costs. Unless it
cuts our own employer's productivity--which in hard-to-track ways it may well
do--it doesn't even get subtracted from the GDP. Ditto the time we spend trying
to figure out whom to call when our phone is out of order. In other words,
these companies are improving their bottom lines by shifting costs from
measurable cash to immeasurable hassle.
What's
more, there are theoretical as well as practical reasons why deregulation may
not always produce net gains. That's because, for much of our day, we live in
the world of the second best.
Popular economists don't like to talk much
about the world of the second best because it's such a messy place. It inhabits
those sectors of the economy where one or more requirements of purely
competitive markets--many suppliers, a relatively homogeneous product, easy
access for new companies to the market, enough information for consumers to
make the best buys--cannot be met to a substantial degree.
Sometimes
the operative constraint is physical--you can't build airports just any old
place. Or entry costs are so high that no one will pay them unless guaranteed a
return, at least initially--as when cable TV was new. Sometimes it arises from
the nature of the enterprise--you wouldn't want to have to have dozens of
different telephone lines in your house just so you could connect with all the
different phone companies your friends might select. Sometimes it's because
there are nonmarket goods involved--the high value people place on personal
safety, national security, a clean environment, or social welfare. Sometimes
the products being sold--such as sophisticated medical care--really are too
complex for anyone but a specialist to understand fully.
Of course, no markets are really perfect in this imperfect
world, and you want to be careful not to let suppliers exaggerate the
constraints to buttress an unwarranted case for de facto or legislated
monopoly. But second-best situations abound, and here's the upsetting thing
that economic theory tells us about them: In the world of the second best it
is not guaranteed that a move toward eliminating the market imperfections will
make the market more efficient . In such a situation, for example, cutting
regulations and increasing competition might make consumers better off--or it
might make them worse off. There are no guarantees.
This, of course, is not a
very satisfactory state of affairs for theoretical economists--or, for that
matter, policy-makers or speech writers. It means that instead of blandly
assuming less regulation is better than more or more competition is better than
less, you have to study the specifics of each case very carefully. And you have
to keep experimenting with alterations and examining the results as external
conditions change over time. And this can be very tiresome for everyone
involved.
So I can't tell you if
deregulating utilities will necessarily lead to lower-cost, more efficient
electricity service. Or whether the recent move to consolidation among the
regional companies created in the federal breakup of AT&T will make
telephone service better or worse. But, a priori, neither can anyone else.
