Welfare loss to monopoly under public ownership: A study of the municipal natural gas distribution industry

Government ownership is one of the policy approaches to the control of monopoly power in the utility industry. Welfare loss estimates will be biased downwards if potential cost increases under monopoly are not taken into consideration. The purpose of this study is to empirically investigate the extent of deadweight welfare loss in publicly-owned utilities, using a methodology that incorporates failure to minimize costs into the allocative loss measure.;Municipal gas utilities are the subjects of the study which comprises an economic analysis of one of the lesser-examined segments of the utility industry. Three customer classes--residential, commercial, and industrial--are examined. Demand functions are estimated for each of the three classes. The cost function is specified in multiproduct form.;The hypothesis of separability in outputs and inputs could not be rejected. All other restrictions on production were rejected at the.05 level. The hypothesis that municipal gas utilities achieve relative price efficiency in the use of inputs could not be rejected. The separable, minimum cost function was therefore used to obtain estimates of long run marginal cost for the welfare analysis.;For the residential class the mean welfare loss was equal to 4.4 percent of utility total residential revenue. Corresponding values for the commercial and industrial classes were 1.8 and 3.3 percent, respectively. The only statistically significant difference in means occurred between the residential and commercial classes. Analysis of ratios of price to marginal cost indicates that municipal gas utilities engage in third degree price discrimination, with nonresidential customers as the beneficaries.;Deadweight welfare loss was found to exist in publicly-owned gas utilities. The adverse effects of monopoly seem to be the most severe for the residential class. However, there was also evidence of scope economies between the residential and nonresidential outputs. The effects on residential customers must be assessed in view of the benefits of achieving scale economies through rate structures that favor nonresidential customers. (Abstract shortened with permission of author.).