The Daily Beast reports that Detroit cut off water to residents owing money while NOT cutting off businesses (including the state) that owe millions of more dollars. Detroit’s problem of cutting off a human right – water – is founded in monopoly principles.
Let’s first address something fundamental: people in Detroit don’t have money, because they’ve never recovered from the Great Recession. Active businesses in Detroit do have money, because if they didn’t, they would be shut down just out of market principles.
Most public utilities are “natural” monopolies. There are such things as natural monopolies. These are companies that provide a good or service in such a way that breaking them up into little companies would be inefficient – the good or service is produced at higher cost, thus raising prices.
However, a natural monopoly is dependent upon one key variable: it’s cheaper for them to produce en mass than to produce scarcely. Since monopolies are all about producing scarcity in order to command higher prices, they either have to a) produce less, or b) produce surplus (inventories), which eventually creates a scarcity in production. This means that monopolies by definition are not efficient. Something known as “dead weight loss” always occurs in monopolies.
But there is something else that creates a “dead weight loss;” negative externalities, which in this case will be the loss from people getting sick (or worse) due to lack of water – in Detroit; which sits on the banks of the largest fresh water supply in the world.
There are two ways to regulate natural monopolies. One is making the company (in this case, utilities) a public entity. The other is to have a public commission cap prices based on the cost of production. Some states do both, as in the Tennessee Valley Authority and the New York Power Authority. They are electricity-generating companies that are regulated by a public service commission, and owned by the people of those states. They are not perfect. However, with the addition of a social safety net, nearly everyone gets electricity.
Detroit water is a publicly owned utility (owned by the citizens of the city), but it’s obviously not regulated. The other problem Detroit has is that the Michigan governor, due to its impending bankruptcy, has suspended democracy. The city is being run by the state regardless of who gets elected locally. This makes Detroit water (in property rights terms) owned by the state now. And they’ve refused to pay themselves $5 million racked up in water bills.
Did I mention that monopolies are naturally inefficient? What’s more inefficient is the “iron cage” of bureaucracy (à-la-Max Weber). Add the two together, and it’s a Fiesta for inefficiency.
It would seem more efficient to go after the businesses that are racking up (almost) $10 Million in water bills rather than residents (who owe less) who depend on it for life. Economics is (or should be) concerned with the material well being of society. And if the Michigan governor is so concerned about economics, then efficiency, and the well-being of a half-million registered voters has to be taken into consideration.