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would skyrocket for rural users. While businesses probably would benefit, residential

users would remain vulnerable to the market power of their local utilities.

Fortunately, those fears are overblown and misguided. Consumers are not well

served in the long run by regulations that interfere in the bargaining process between buyer

and seller. Not only are the remedies worse than the diseases, but the diseases in question

are nowhere near as threatening as consumer groups would have us believe.

Rural Customers Do Not Require Subsidy

Analysts often favor regulated monopoly franchises because the restrictions on

entry allow the firm to overcharge some customers and use the revenues to subsidize

other, frequently rural, customers. Under normal market conditions, if private firms "tax"

one class of customers to help another class of customers, competitors enter the market to

serve the "taxed" class of customers at lower prices.

In general, so-called cross-subsidies are not viable in competitive markets and,

thus, monopolies in basic services needed by all consumers--such as first-class mail,

electricity, and phone service--are justified by their ability to permit the cross-subsidy of

high-cost (often rural) service as well as pay for the "guarantee" of universal service.45

Yet the need for rural cross-subsidies is overstated. First, the "boonies" seem to get most

other basic goods and services, such as milk and oil changes, without state-mandated

subsidies. Second, recent research on the costs of rural telephone companies suggests that

rural service may not be as high cost as most analysts assume.46 Third, decentralized

generation technologies are advancing so rapidly that traditional expensive copper wire

transmission may not be necessary in isolated areas in the future.

Even if rural electricity service costs more than urban electricity service, why

should urban and suburban residents have an obligation to provide a subsidy? The

advantages and disadvantages associated with particular land sites are embedded in their

prices. Urban areas have advantages, but they are not free. The economies that come

from urban density manifest themselves in higher urban land prices. Urban residents pay

for advantages, like lower utility costs, through higher land prices. Similarly, rural resi-

dents are compensated for the disadvantages that are associated with low-density living by

lower land prices. To subsidize rural services is to double compensate residents.

In general, penalties imposed on sellers and consumers in the electric industry

should be avoided as ways of paying for remote access. Such transitional problems are an

argument, not for continued regulation, but for limited welfare relief at most.

Price Gouging: Competition's Best Friend