‘Natural monopolies’: Is there anything everyone agrees should be government-owned?

Some of the arguments around state or private ownership are based more on principle than efficiency—but in certain sectors, called ‘natural monopolies’, even hard-line free market proponents tend to think state-owned is the way to go.

In a natural monopoly, it actually makes sense for a single firm to coordinate production rather than lots of firms competing, purely because it's so costly to set up that it’d be a waste of time and energy to try and duplicate it (or in economics terms, the barriers to entry are too high).

The most familiar examples are utilities—like water, electricity, natural gas, or sewage. Cities don’t need more than one set of roads, railways, or bridges; imagine a city with twenty different piping systems running alongside each other and you’ll see why they call it a natural monopoly. That doesn’t mean different firms can’t be involved in improving the sector; it just means one firm will have control over the basic infrastructure.

The question is, who? If the first company to take the leap into a new natural monopoly sector is allowed to do what it wants, then once they’ve made that initial (expensive) investment of building the infrastructure, they’ll have serious economic power to set prices high. Ordinary people end up with little choice but to use those services, because natural monopolies are often in sectors running things we can’t live without (like water, or electricity).

To make sure these services are accessible to everyone, governments quite often run these sectors instead, or at least regulate them pretty heavily if they’re privately owned. But if technology develops to the extent that barriers to entry are much cheaper than they used to be, we need to ask ourselves again whether it makes sense for governments to keep a hold of an industry, or whether to involve private companies too.

Why does this matter? Because whether or not to nationalize industries comes up in political debates all the time, and if the industry is a natural monopoly, it might make sense to say yes, but if it looks like technology might take that industry in a new direction, then maybe we’ll have to think again.