Wendy Duncan, Contributor
A National Water Commission trench becomes a play area for children on Ninth Street in Trench Town, Kingston, last October. - RUDOLPH BROWN/CHIEF PHOTOGRAPHER
IN THE 1970s, the Jamaican economy was characterised by a few large government monopolies and almost every market was regulated. Competition was implicitly discouraged as resources were not allowed to flow freely to their most productive uses.
During the last two decades, many countries, including Jamaica, committed to free market economies which entailed embarking on policies of de-regulation. The term has been used interchangeably with words such as liberalisation, de-monopolisation and privatisation. It is, however, distinct from these.
Deregulation involves the removal of controls on a particular market aimed at improving the economic efficiency of that market, and therefore the performance of the economy at the microeconomic level. Tools of government regulations, which distorted the market signals, include price controls, licences and permits, subsidies and cross-subsidies, tariffs and other taxes. These are all instruments to control the price or supply of goods and services so as to benefit specifically selected sectors in the society.
This massive wave of deregulation paved the way for competition among enterprises, which would provide opportunities for new and creative entrepreneurs to enter the markets. Unfortunately, not all goods and services are capable of being delivered in a competitive environment. Some markets may be described as natural monopolies.
NATURAL MONOPOLIES
Natural monopolies are markets for goods whose production exhibits economies of scale, so that average production costs for these goods decline sharply as production expands. A limited market size would therefore mean that only one firm would be able to exploit the economies of scale in order to profitably offer the good at a reasonable price. The small size of the Jamaican economy serves to exacerbate such a feature in some local markets.
Natural monopolies tend to occur in the markets for utilities such as electricity, gas, telecommunications and water. The primary reason for this tendency is the huge investment costs required to supply utilities. This feature therefore erects a legitimate shield against competitive forces and, as such, there remains a need for regulating some aspects of these markets. Hence, the Office of Utilities Regulation (OUR) was established in 1995.
There are some features that would positively influence the scope for competition in a specific utility market by mitigating this natural tendency to be served by a single firm. The growth of wireless technology in the telecommunications sector has had such an effect, to the extent that the forces of competition have been visible in the mobile telephone market in recent years as evidenced by the downward trend in price of mobile calls and the continual increase in the number of Jamaicans with mobile phones.
Water is such a vital commodity, its control and distribution raise a multitude of environmental, social, health and security concerns. The primary concerns in the sector are the accessibility, distribution, quality and price of water throughout Jamaica. A desirable water sector would ensure that each Jamaican, including those in isolated regions of the island, has access to potable (drinkable) water at a reasonable price.
Organising the water sector in a competitive manner generates greater social good and would therefore be the best option for policy makers. In the absence of any mitigating effects, the monopolistic tendency of this sector rules out such an outcome and only a second-best situation would then be possible.
Adapted from a presentation made by Wendy Duncan at the Sam Sharpe Teachers' College in March, 2004. Wendy Duncan is a lawyer at the Fair Trading Commission.
