If public utilities are a natural monopoly, what would be the danger in splitting them into a number of separate competing firms?

A natural monopoly is a type of market structure where a single firm can produce the entire market's required output more efficiently (at a lower average cost) than multiple firms competing with each other. This occurs when there are significant economies of scale, where the firm's average cost decreases as it produces more output. Public utilities such as water, electricity, and gas supply are commonly considered as natural monopolies because of their large fixed costs for infrastructure and the decreasing average costs as they serve more customers.

If a natural monopoly like public utilities is split into separate competing firms, multiple issues may arise: 1. **Decreased Economies of Scale**: If the natural monopoly is broken up, the economies of scale may reduce, leading to overall less efficient production and higher average costs. This could result in higher prices for consumers. 2. **Duplication of Infrastructure**: Competing firms will need to build their own infrastructure (e.g., power lines and water pipes), which can be costly and lead to duplication and an inefficient use of resources. 3. **Unequal Access to Services**: If the utility companies are competing, they may focus on serving profitable areas or customers, which could lead to unequal access to essential services for people in less economically attractive areas. 4. **Higher Uncertainty for Investors**: Competition between utility firms might create greater uncertainty for investors, as fluctuations in market share and profitability could make it more challenging to secure funding for long-term projects and infrastructure improvements. 5. **Degradation of Service Quality**: Competition could force firms to cut costs in order to offer lower prices, which may lead to degradation of the service quality and underinvestment in maintenance and improvement of the infrastructure.

In conclusion, splitting public utilities, which are considered natural monopolies, into separate competing firms could lead to several potential dangers, including decreased economies of scale, duplication of infrastructure, unequal access to services, higher uncertainty for investors, and degradation of service quality. These issues highlight the importance of carefully considering the structure of public utilities markets and the potential consequences of introducing competition in an industry that may function more efficiently as a natural monopoly.