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Private Enterprise Development
November 1984
>> This Is USAID >> USAID Policy Papers >> Private Enterprise Development
[Download original document] ANNEX A
Natural Monopolies: Until recently, the concept of a natural monopoly was not controversial. The generation and distribution of electric power, telecommunications and some forms of transportation were assumed to be natural monopolies. However, today's technological advances make it more difficult to define a natural monopoly. Activities which are site-specific and require heavy investments in infrastructure to achieve the least cost in the production and distribution of goods have been considered as natural monopolies. However, applying this definition to specific situations usually provokes debate among different political and economic interests within an LDC and different countries have reached different conclusions in similar situations. However, even when a domestic political consensus exists that a particular activity fits a definition of a natural monopoly, there is considerable room in most LDCs to manage the function in a profitable or at least a cost-minimizing fashion. The implementation, construction and management of the public good can often best be undertaken by the private sector with public oversight, as in the case of regulated public utilities.
Goods With Externalities: An externality is associated with particular goods or services when individuals or groups cannot be excluded from benefiting from (or being harmed by) the provision of the goods or services to another intended group. Furthermore, no pricing mechanism can be established to compensate (or charge) the supplier commensurate with the additional recipients' estimate of the benefits received (or costs incurred). For example, when some children in a village are immunized against an infectious disease, those who are not immunized still receive some benefit because their chances of infection have been reduced. Even in situations in which there is a significant demand for immunization, free riders can take advantage of a competitive market's inability to charge them for the benefits they have received by virtue of the consumption of others. If the prevalence of free riders threatens the existence of the market, the good or service may be declared a public good and non-market procedures introduced to ensure that the supply continues.
Merit Goods: Merit goods are goods which society (often paternalistically) argues are good for the individuals and should be consumed in a greater amount than the individual would purchase in a free market. For example, at a market determined price an individual may not consume an amount of education that society believes he or she should. Consequently, society, acting through government policy, may interfere with the market by lowering the price of education through a subsidy. However, a developing society also benefits in that the general level of competence has risen. Consequently, it is in society's interest to try to expand the supply and consumption of such a merit good for the benefit of all. Many activities in the fields of public health and education provide good illustrations of externalities and merit goods. For such services a government may provide a higher level of service or set a lower price than that which would result from purely competitive market forces. However, many LDCs have identified natural monopoly situations, externalities and merit in a wide variety of other goods and services and have abrogated the market to provide an administratively determined quantity of goods and services at an administratively determined price. In most LDCs the list of public goods or quasi-public goods includes such items as food, clothing, energy, transportation, agricultural inputs, construction materials, and communications equipment.
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Last Updated on: July 11, 2001 |
