Chapter

The Economics of Production Cost: Pipelines as Natural Monopolies

in The Political Economy of Pipelines

Published by University of Chicago Press

Published in print April 2012 | ISBN: 9780226502106
Published online March 2013 | e-ISBN: 9780226502120 | DOI: http://dx.doi.org/10.7208/chicago/9780226502120.003.0003
The Economics of Production Cost: Pipelines as Natural Monopolies

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This chapter evaluates the theory of natural monopoly to show how pipelines are highly idiosyncratic cases of natural monopoly, where the sustainability of their market power is challenged by geology, geography, time, and the regulation of pricing and entry. The natural monopoly has failed in practice to develop a single, investor-owned pipeline in a major regional fuel market. For pipelines, charting the cost curve can be reasonably approximated by exploring the link between output quantities, or the capacity of the line, and the construction cost. The geography and the locationally fixed and irretrievably sunk nature of pipe costs, the politics and the way it determines who builds investor-owned pipelines and where they are built, as well as the regulated pricing itself, were the three attributes of pipelines. In general, the concept of natural monopoly cannot advance the economic analysis of pipeline transport very far.

Keywords: natural monopoly; pipelines; geology; geography; time; pricing; entry; fuel market

Chapter.  5874 words.  Illustrated.

Subjects: Political Economy

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