Monopolization of a Water Supply

Water, water everywhere, but not a drop to drink

A charge occasionally levied against libertarianism is that a vital natural resource, such as a water supply, could be monopolized by an astute businessman, who could then hold society hostage with the threat of cutting off its ability of replenishing its bodily fluids. This is a most curious attack upon capitalism, because it touches upon a fundamental aspect of the system – property rights. Property rights exist for the very purpose of resolving the problem of scarcity. The “water-monopolizer” attack, then, attempts to suggest that scarcity discredits private property – when scarcity is the very problem property rights exist to resolve! [1]

Let’s unpack the water-monopolizer situation (WM henceforth) and analyze it from two different sides.

From a property rights perspective, if a person has legally [2] obtained the title to a water supply, then in accordance with property rights he cannot be coercively compelled to relinquish it either partially or wholly. In this respect, the body of water is his property just as his refrigerator is. For someone who accepts the right to property, the conclusion to this scenario is straightforward and the discussion ends here.

Stopping there, however, is unsatisfactory to some people. In all honesty, if this were the sole response to the WM, I too would be a little unsettled, even if I accepted the conclusion. What can be said to a “bleeding heart” who fears for the well-being of the members of the community with the WM? Plenty, as it turns out. [3]

The market is complex process far more dynamic than opponents believe

The main mistake that people make is to forget that the market is not static, but a process. Not only that, but it’s a complex web of inter-dependencies, incentives, and opportunity costs. Let’s see how this plays out.

You ask “what if one person owns the water supply?”

Well, how did he just happen to come to own the water supply? Was he the first person to homestead the entire thing? This is odd, because it likely means that there was no one else in the area before he got there. This means that it’s the fault of whoever decided to come into the area afterwards that he didn’t consider water supply before moving in. That is, if person A is the first person in an area and takes over resource X through legitimate homesteading, I don’t see there being any justice in another person B coming into the area later and whining about not having water. Why would he settle there?

What if, then, there was a group of people in the area for some time, and one of them suddenly decides to homestead the water supply? My question is then “how did that population exist for so long before the homesteading of the water? Did they not drink any water?” The only logical progression of events is that they must have made use of the water supply before the monopolization. As such, they very well could have claim to an easement over part of the water supply, which resolves the issue. [4]

Only in capital-M Monopoly are prices actually so fixed

Consider another option: at some point, there were numerous owners of the water supply, but after a bunch of buyouts the water supply consolidated in the hands of one man. This is likely unfeasible, because as the supply decreases, prices tend to increase. That means that as the supposed monopolist buys more and more water, the remaining owners are more and more likely to hold out their share because they can extract a higher price from him. Imagine, too, if word got out that one person was trying to monopolize the water supply. Consumer groups would then also have an avid interest in buying the water supply to guarantee that people won’t be denied water.

Even in the worst case scenario, if one person does manage to get all the water, remember that water is not the only vital resource. There are resources that the monopolist himself would need. If other people own these other resources, they can withhold these resources from him until he breaks. In fact, since roads would be privately owned, road owners could refuse him passage across their land.

Trucks from the town next door are revving their engines already

Also, notice a slight omission in the original question: “an astute businessman, who could then hold society hostage.” Catch this mistake whenever possible! Which society? The answer is this specific society. If word gets out about this evil monopolist beyond the local area, then other communities could very well boycott the man’s goods and deal him a financial blow. Furthermore, firms which bottle water in other areas would have an interest in driving in water to the monopolized town because of high profits. This would drive prices down and break the monopoly.

For some economic jargon, if a person decides to withhold resources past the point of unit elasticity of demand, he begins to lose money [5]. This means that the monopolist would be losing money in the present that could have been invested, and the investment could have gained value in the future. And lastly, and oft-forgotten fact about actors in an economy and society – they are humans! They have a memory! What is the monopolist’s long-term strategy? Since a society hard-pressed enough will find substitute sources of water (digging wells, harvesting rain [6]), what does he plan to do after his water monopoly (inevitably) breaks down? It’s absurd to think that a businessman who was able to amass enough wealth to buy out a water supply would act in such a foolish manner. [7]

The market is remarkably good at preventing evil monopolies [8]. And in the unlikely event that one such attempt does somehow slip through, once it has been thwarted I expect a web of contracts to spring up that guarantee that such a scenario could not possibly happen in the future. Properly constructed around property rights, such contracts would be enforceable, and then the law would morally be able to directly stop such attempts. [9]

-Wheylous

—————-

[1] One of the motivations for this criticism of the free markets is a belief that evil monopolies would be rampant on the free market. This claim has been repeatedly refuted both in theory and in the historical record by libertarian scholars. Look up “robber baron” or “Gilded Age” on the Mises.org website if interested. On the topic of utilities being natural monopolies, see “The Myth of Natural Monopoly

[2] The note here is that the acquisition of property rights must be legitimate – either homesteading of previously-unowned land or transfer of title from another previous rightful owner.

[3] In most libertarian discussion (at least at a lower-level), there is an apparent divide between the rights-based approach and the utilitarian approach. It is interesting to consider, however, the possibility of morality being just another mean to an end – that is, the utilitarian basis for the existence of a code of rights. For an introduction to these ideas, see “The Utilitarian Foundation of Morality

[4] It is outside the scope of this article to describe the precise process of establishing easements – it suffices to say that easements are rights to use (as opposed to ownership) of a natural resource acquired while the resource was unowned.

[5] A quick explanation of price elasticity of demand: the demand curve for a given curve slopes downwards (in accordance with the law of diminishing marginal utility). The graph has price of the good on the y-axis and quantity on the x-axis. If the seller were able to price the good at any desired point along the demand curve (providing, of course, the appropriate quantity demanded), he or she could receive varying amounts of revenue in their sales equal to the product PQ (the price of the good sold times the number of goods sold). There is a point on the curve called the unit elastic point at which revenue is maximized for a given demand curve. Decreasing the price from there will result in a decrease in revenue – more units will be sold, but the lower price for each unit more than offsets the increase in units sold (this is called inelastic demand). The opposite happens if the price is instead increased past the unit-elastic point – each unit is sold at a higher price, but the decrease in units sold more than compensates for the higher price (this is called elastic demand). Hence, there is a point beyond which a monopolist would find it foolish to increase the price of a good. Remember, once again, that while the neoclassical theory of monopoly claims that monopolists can exist on the free market and can decrease production to the unit-elastic point to increase revenue, evidence for this is scanty if at all present. See pg. 16, Government Failure versus Market Failure by Clifford Winston – indeed, the evidence shows that government fails to decrease consumer prices by busting large businesses.

[6] I wonder where the members of the society previously got water to irrigate their crops or feed their cattle.

[7] A strong theoretical case against both monopoly pricing and predatory pricing has been made in the literature by Thomas DiLorenzo. See “The Myth of Predatory Pricing

[8] Not only is the market remarkably good, but there is no reason to believe that the government or any other institution would be any better than the market.

[9] A word of caution, however, to those who held their breaths until the mention of “law” and then breathed a sigh of relief. We have been conditioned to see the swinging weapon of the “law” (usually, as we’re taught, by government) as a tool that can achieve any positive social outcome. The government action model is intriguingly elegant – if there is a problem, all that is needed is to identify it and dispatch the necessary bureaucrats to solve it. Do not think that just because the law can now (after the contracts mentioned in the article) take morally permissible action against monopolizers that it will suddenly do a “better” job than the “mere” free market. Free market checks and balances as explained throughout the article are remarkably resilient, even if present only as incentives to individual actors and not as laws or contracts carved in stone.

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16 thoughts on “Monopolization of a Water Supply

  1. Marcos 12/12/2012 at 17:32 Reply

    Great article!

  2. Zorz 12/13/2012 at 02:04 Reply

    I’m a hardcore libertarian and would always choose private vs public (gov) owned business.
    But lets look at the real world for a sec. Currently most water supply’s are owned by local government and if we ought to switch our society towards free markets that has to be done from current situation… We can not rebuild everything.

    That’s when privatization comes into play, government which is inherently corrupt, now has to go through the privatization of WS company. The problem with privatization of water supply lies within natural monopoly of distribution of water (similarly to electricity, but more expensive).
    Water distribution (infrastructure) can be monopolized by one company, easily.

    Although this would certainly be resolved in the long run, as you have said, high prices would make other sources/distribution systems more viable there would still be public outrage by abuse of monopoly since water is so essential for comfortable living.
    Yet again the real world, this would make free market policies look bad, people would get frustrated and demand for government intervention.
    Solution for this would be keeping the distribution in public hands, privatizing only the production. As far as i know this is usual approach for electricity market.
    Also, I have noticed that municipal run business tends to be more efficient than federal gov equivalent so this may be a good compromise.

  3. jargon2 12/13/2012 at 09:09 Reply

    @ Wheylous

    Nice article, but it seems like you’re making some presuppositions in your scenario. One of which that sticks out most to me is of the market’s ability to break apart cartels. Libertarians often refer to the Gilded Age’s failed cartel era which led to the merger movement. This happened in competitive industry. But do the same incentives apply to the ownership of water? Does the owner of the water here actually produce anything, or is he simply inducing people to economize by right of his ownership. In the industrial cartels of the Gilded Age, members of the pool were incentivized to undercut their fellow pool-members to attract a broader consumer base. The incentive which induced one to join into a cartel would be the exact same inducing one to break the cartel. But how does this play out in regards to the ownership of water? If two or more businesses decide to pool their resources and buy the water totally, they will basically have a trust. Each company owning a fraction of the trust, there is no mechanism for ‘cartel-breaking’. They’ve pooled their resources and bought the property and can now charge whatever they please for it. There’s no incentive for them to break the agreement. I submit that cartelized buyouts are a plausible business strategy, even on the free market, in regards to control over water.

    This does not mean that the other points are invalidated, but privatization of water supply is not a perfect system. It invites the designs of abusive businessmen. There is no competition where there is no production, and they are not producing water, merely selling it.

  4. wheylous 12/13/2012 at 15:37 Reply

    Jargon – I think you’re falling into the trap that a bunch of other readers are – you focus on one way in which the market (as explained above) breaks monopolies and critiquing it without realizing that the reply is already included above. You talk of the possibility of two companies combining to form a trust. However, I already mentioned how owners of other resources could then restrict their products to the monopolizer. Furthermore, there are outside influences which force the monopolists to conform as well. The result is that a trust will *not* hold the village hostage. At most, it will extract above-normal profits. In the long run, however, this will likely be uncertain. Historically, at least, DiLorenzo refutes the claim of natural monopolies in utilities in the article I reference in [1] http://mises.org/daily/5266/

    • jargon2 12/13/2012 at 23:04 Reply

      But even there, you are already presupposing a pretty flat distribution of ownership of businesses/resources. It could well be he who owns the road leading to the reserve who is interested in cartelizing it. If that weren’t the case, I imagine that the thought would occur to the prospective cartelist.

      The outside influences of which you speak sound ‘soft’. They don’t sound like proper economic arguments but assumptions that the people living by the water supply will organize social action against the cartelists. It kind of strikes me like saying “Dictatorships aren’t bad, because if they were, then the people would rise up and overthrow them.” Well yes, people might overthrow dictatorships but there would be some major hurting between the start and the finish of that.

      Would you apply the same reasoning to, say, the Suez Canal? A near totally unique strip of land/water which has no competitor for its important purpose?

      Yes, in the long run it will work out, but only because people won’t want to live there, where the previous residents’ lives had been made so miserable by the water cartel (assuming there was one).

      • wheylous 12/14/2012 at 00:36 Reply

        I’m not just relying on goodwill. Aren’t there economic incentives for outside businesses to bring in goods to sell? For example, the Steel Trust in the early 20th century.

        Furthermore, roads and water aren’t the only essential things in an area. You also have food distribution. And this itself relies on supplies from other industries.

    • Jargon2 12/14/2012 at 01:08 Reply

      How does the example of the steel trust apply to waterworks? An outside water company can’t just ship over a lake to plop down next to the monopolists’. There’s significant shipping costs involved in getting water from other companies that don’t apply to manufacturing industries, which can install plants next to competitors’. The ‘plant’ for the water company is the source of the water, and water sources can’t be moved. Competition in water is much less simple, as the locality surrounding each water source is much more vulnerable to the conduct of its owner(s).

      And, if a cartel monopolized the water supply, presumably they could have the profits to deliver in goods from afar with which to staff employees , not necessarily in the town they’re inflicting with monopoly profits.

  5. wheylous 12/13/2012 at 15:45 Reply

    Zorz – you bring up a good point – privatization is tough. In the long run, problems would resolve themselves, but the short run matters too. I hope to read more on how to properly privatize. For now, one thing to consider is the possibility of simply opening up water supplies to homesteading.

  6. claytonkb 12/14/2012 at 03:09 Reply

    The most important limiting factor of a cartel or monopoly is -defection-. http://mises.org/rothbard/mes/chap10a.asp#2._Cartels_Consequences

    • jargon2 12/14/2012 at 06:39 Reply

      I’m informed of rothbard’s stuff on cartelization, but the problem here is different. Take for example a steel cartel. It is compose of a dozen industrialists each with their own facilities. They pool together to fix a price. One of them defects because he wants to broaden his customer base. The others follow. The cartel is broken. But now take a water reserve. A dozen industrialists agree beforehand to each buy up 1/12 of the reserve. They then agree to put the pieces together in a company. That company can redraw the property lines so that the reserve is a single asset and the industrialists are basically shareholders. There is then a clear case for charging a monopoly price. Defecting in this case would basically be selling off your shares. There wouldn’t be a way to ‘break’ the arrangement up.
      There are very real cases of this happening, though they were indeed through statist means, and the results being very bad for the average people. See: Bechtel, Bolivia and Water Rights.

      The problem is that monopolizing production has clear incentives for defection, but it isn’t clear to me that monopolizing ownership of special land does.

      • claytonkb 12/14/2012 at 09:07 Reply

        Yes, clearly, cartels aren’t -impossible-, they’re just unstable.

      • wheylous 12/14/2012 at 17:14 Reply

        Jargon – would the owners be willing to integrate ownership rather than cooperate on production?

      • Jargon2 12/16/2012 at 12:54 Reply

        Wheylous – That’s my point basically, that water reserves lend themselves much better towards a cartelization of ownership than a cartelization of production. A rhetorically talented cartelist would likely pursue the former when pitching to fellow cartelists because it is a much more stable arrangement than the latter.

  7. AristippusofCyrene 12/14/2012 at 06:16 Reply

    I really think this is a life-boat scenario, and raises the question: “what if the state monopolized the water supply and denied it to people?” Statists have at least the same difficulties with this as libertarians do.

    The whole scenario is just completely out of context (as discussed in the article). What I would like to know is how a single person came to own the water supply by libertarian property standards. Does he use the entire area by himself? If others helped him, then they can defect. Was no one using the water supply before? If not, why do they want to all of a sudden? Where did they come from?

    • wheylous 12/14/2012 at 17:35 Reply

      This is very important indeed. You need to look at the process of acquisition of the property. That in itself is pretty big. I doubt that you can homestead that much land without someone doing something about it in the meantime.

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