Disequilibrium and Increasing Costs: A Study of Local Telephone Service

Abstract

THE LITERATURE of public utility economics is replete with discussions of the monopoly phenomenon which is characteristic of firms operating in utility industries. There has been much analysis devoted to the question of pricing utility services sold by natural monopolies under conditions of decreasing long-run average costs.' With decreasing costs, as demand increases, there are incentives for a firm to expand to increase profits. Under these conditions the profit goals of the firm and the social goals of the regulatory commission coincide, since lower average costs can be translated, in part at least, into lower rates to consumers by a commission. There has been, however, very little discussion of the pricing and regulatory problems of natural monopolies which have increasing long run average costs, if such a thing exists.2 It is obvious that in situations in which the market