Quote Originally Posted by BananaStand View Post
Once upon a time there was a private enterprise called Central Vermont Public Service. They sell electricity. However, in order to protect consumers, the market must be regulated by the government, otherwise.....this happens....

First, some explanation. CVPS must get it's prices approved by the government. And this example illustrates why. Basically they add up all the capital the company has invested in it's infrastructure to deliver electricity. Then they apply a competitive market rate of return. That amount of dollars is divided by the amount of KW hours they plan to sell and voila....there is your price for electricity.

As you can see, there is a profit-motive to invest capital. Therefore, the managers at CVPS are incentivized through a bonus program that requires them to spend their entire budget. Saving costs is discouraged.

Here's the result....

Let's say you're a project manager charged with building some electrical doo-hickey somewhere in Vermont. You check it out and find that you need a permit from the town in order to construct a building to house your little doo-hickey. Except before you get a permit, you need to submit an environmental impact study. And then you have to get your plan approved by the board of selectman which meets infrequently. So all in all....the red tape you have to navigate means you might get to break ground on your new project in 14 months.

But you were charged with spending your whole budget this year. Otherwise you are considered a failure at your job.

What do you do?

you go into future years and you pull projects that aren't due yet, into the current year so you have something to spend money on. Now those telephone polls that aren't due to be replaced for another five years, get replaced today.

The result, is that CVPS increases it's capital investment, thus increasing the amount of money they require from the public, in order to generate the same return on investment.

So CVPS got busted doing this, and the VT gov't said "WHOA, you can't do that! Your'e charging people for shit they don't need yet!"

So then the gov't basically disqualified huge chunks of capital investment for the purposes of a rate calculation. This left CVPS with terrible cash flow and their bond rating plummetted to 'junk' status overnight.

So then the CVPS shareholders are like....."why the fuck am I doing this?? I could just invest my capital in a mutual fund and make more money with a fraction of the risk"

What's stopping them from pulling out and leaving Vermont in the dark?

It's hard not to imagine this same model would apply to privatized education. the investors in the school-business are going to expect a return on their investment that is competitive with other similar investments, and makes it worth the risk. How do you prevent this from being excessive? How do you prevent a school from adding extraneous amenities like yoga studios and and seaweed buffets in order to drive up capital investment, and therefore increase revenue without actually providing better education?

You can say "the market" but that's not true. If the market rejects that school, and it fails, then what happens??

in the case of the failing CVPS and a failed private school, the government would have to intervene, or at least make concessions in order to help the business stay afloat. And if that's the case, why doesn't the government just run it in the first place??

If you're going to have the goverenment subsidize the risks of private businesses, then those businesses are not taking any risk. And if there is 0 risk, what kind of return should they expect? NONE in my opinion.

If they are making a return, it's because the government put their thumb on the scale. And I have a problem with a private enterprise making profits only by way of the government subsidizing their risk. that's essentially the government picking winners and losers among private businesses.

So in these instances, it's probably better if the government just handles it themselves.
I know I asked, and thanks for responding. I'm burned out on this so I don't think I have much to respond with. I'll say these two things.

That scenario isn't market failure. And an elimination of the profit incentive is effectively equivalent to elimination of the good/service itself. It sounds nice to have the government step into markets and eliminate the profit incentive, but it doesn't work. It only appears to work for a period of time and because it's being subsidized by something else.