Economic Concept of A Public Utility

The Suntory and Toyota International Centres for Economics and Related Disciplines
The Economic Concept of a Public Utility

Author(s): H. E. Batson
Source: Economica, No. 42 (Nov., 1933), pp. 457-472
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I933]
The Economic Concept of a Public

Utility'
By H. E. BATSON
SOME justification may seem to be needed for my choice of a

subject for this paper, since the term " public utility " in the
strictest sense cannot be considered to refer to an economic
concept at all. Primarily, a public utility is whatever is defined
as such by American statute law. The case for a concept of this
kind cannot be adjudicated by economists.
But the term " public utility" is not restricted to this legal
meaning. We meet it in official papers referring to English indus-
tries,2 in which context the declarations of American law are
obviously irrelevant. Behind the legislative concept of public
utilities lies in fact a political concept, which may be defined as
the idea that certain industries need special Government regula-
tion. Even in America, an industry miglht be a public utility
in this sense without being a public utility in law.
But this political concept is in its turn based upon the idea that
there are certain industries in which the ordinary restrictions of
individualism are insufficient to ensure the appearance of satis-
factorily individualistic results.
Thus one term is forced to do duty for three related but quite
distinct concepts. When the law of Illinois says that the owner
of any property within the State used for the production of
electricity is a public utility, it is using the term in the fifst of
these senses. When the English Labour Party says that the iron
and steel industries ought to be reorganised as public utilities,3 it
is using the term in the second or political sense. And when
Professor Glaeser says, " the world over, public utilities are now
considered a thing apart from other commercial enterprises,"4 he
seems to be using the term in the third or economic sense. It is
with the economic concept of public utilities that we are con-
1 This paper was read, practically in its present form, at a meeting of the
Economic Club on February gth, I932.
2 E.g., The Board of Trade Jouynal Supplement, October 6th, 1927.
3 Election Programme, October 1931.
4 Outlines of Public Utility Economics, 1927, p. 4.
457
458 ECONOMICA [NOVEMBER
cerned this evening. It is the most fundamental of the three, and

if it should prove untenable, the case for the political and legal
concepts would be seriously weakened.
2. Our purpose then is, in the first place, to inquire whether it
is true that certain industries differ in this fundamental economic
sense from other industries. The best way of answering this is to
take the industries that are made legal public utilities and see if
they have any special peculiarities that might explain their being
so legislated for.
The different American legislatures have not been, and are not
yet, perfectly agreed about the industries which need to be
labelled public utilities; but there is sufficient agreement among
them for us to be able to say:
i. The following kinds of enterprise are commonly included

within the scope of public utility laws: railways and tram-
ways; postal service undertakings; telegraph, telephone,
water, gas, and electricity undertakings; and enterprises
auxiliary to these.1
ii. Some legislatures define as public utilities the industries
composed of such enterprises as these instead of the enter-
prises themselves. Others define the owners of the enter-
prises as public utilities. These variations are unimportant
as far as the economics of the question is concerned. It is
on the whole most convenient to talk of public utilities as
enterprises.
3. Let us proceed to ask what the special characteristics are

that distinguish these from other enterprises.
We certainly shall not find sufficient ground for distinction in
the characteristics suggested by the name itself. Public utilities
should, on the face of it, be enterprises of public utility; but this
will not carry us very far. In the first place, the idea of utility to
the public is a very vague one that could serve at the best only
for distinctions of degree and not for distinctions of kind. And in
the second place, however and wherever we may draw the line
between enterprises that are useful to the public and enterprises
that are not, we shall find that our first group will include many
other sorts of undertakings than those which we have listed.
Clothes, bread, and houses are of at least as much public utility
as electricity, tram-rides, and grain-storage ; but tailors, bakeries,
1 Some legislatures include enterprises of other kinds, but the doubtful cases
are not very numerous and to neglect them will endanger the validity of our
conclusions less than to add them to our list without a much longer critical
examination thaii is here desirable.
I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 459
and estate agencies are not usually reckoned among public utili-
ties. What characteristic is it that separates the public utilities
from these other undertakings that are just as useful to the public,
but are not called public utilities ?
4. I fear that we shall not find it possible to accept the tra-
ditional answer that public utilities are undertakings which supply
necessaries under conditions of monopoly. My reasons for thinking
that we shall not be able to accept this view, despite its authorita-
tive recommendations, is twofold.
In the first place, we shall have some difficulty in discovering
exactly what is meant by " monopoly " in this context. If it is
to be understood literally, as meaning " exclusive possession of t
trade in some commodity,'1 then it will not be a true descripti
of many of the undertakings that we have included in our list.
But if we are to avoid this difficulty by understanding monopoly
to mean " anything short of perfect competition," which is, I
think, the sense in which the term is generally used in this con-
nexion, then we shall find that we have merely tossed our theory
out of the frying-pan into the fire.
Admittedly the adoption of such a definition makes it quite true
to say that public utilities are monopolistic. But it also makes it
quite true to say that nearly every other sort of undertaking is
monopolistic, too. It might be possible with a little ingenuity to
divide the perfect-monopoly-perfect-competition continuum so as
to segregate public utilities from all other industries " of public
utility "; and then if that part of the continuum in which public
utilities lay were called monopoly and the rest of the continuum
competition, of course the monopoly definition of public utilitics
would be free from this particular objection. Nevertheless, we
should still be obliged to reject it.
For if we defined monopoly in this disingenuous fashion, we
should not be able to proceed according t-o the classical and
marginalist theories of monopoly, which are based on the hypo-
thesis of one seller in a market. We should require a theory of
what has sometimes misleadingly been called duopoly, and what
would doubtless, following J. J. Becher, have been more suitably
called polyp5oly if the word had not been so cacophonous. And this
theory, which is one of the greatest needs of economics; which
would, if properly conceived, cover the whole field of price phe-
nomena in a manner not supplementary but complementary to
the orthodox theories of pure competition and pure monopoly;
this theory has hardly been developed at all, if we except the
1 The Concise Oxford Dictionary.
pioneer work of Cournot, Edgeworth's elegant fragments, and

recent essays by a Danish' and an American2 author which we
must regard with gratitude if not with complete satisfaction. If
writers on public utilities define them in this special sense of the
term monopoly, then they must explain them by this special and
as yet undeveloped branch of theory. I know of nobody who has
attempted to do this.3
And there is a more fundamental objection to this type of ex-
planation. Our search for a definition of a public utility is a
search for characteristics of a definite sort. We do not simply
wish to know what conceivable characteristics the utilities have
in common, essential or accidental, relevant or irrelevant. We
wish to know what characteristics they have that attract the
attention of the politician. A number of contributors to discussions
on this subject fail to observe this point and think that they have
solved their problem merely by propounding a list of common char-
acteristics of public utilities without troubling to inquire whether
these characteristics explain anything. We ask them for an ex-
planation and they give us a description. A typical example is the
theory that public utilities are transport undertakings; another
is the theory under consideration-that they are monopolies. I
do not mean to say that if public utilities were all transport
undertakings or all monopolies that would be a fact without any
relevance at all for the question of State control; but I think
that it would have a derived and not an immediate relevance.
This is even more true if the word monopoly is to be understood
in the special sense mentioned above rather than literally. There
is no imaginable reason why the fewness of the sellers in a market
should of itself alone demand Government interference.
Nobody of course really pretends that there is. What is really
implied is that when there are only a few sellers in a market, they
act in a manner that calls for Government interference. It is not
monopoly that is objected to, but certain supposed manifestations
of monopoly; and it is these supposed manifestations of monopoly
that are the distinguishing characteristics of public utilities.
This criticism might be dismissed as an academic quibble if
1 F. Zeuthen: Problems of Monopoly and Economic Warfare, 1930.
2 A. E. Monroe: Value and Income, I931.
3 Since the above was written, several books and articles bearing more or less
directly on this matter have been published. By far the best of these is Mrs. Joan
Robinson's Economics of Imperfect Competition (I933), but I do not think that
even this helps us much towards a solution of the problems discussed above,
because I do not think that it starts from the right definitions for that purpose.
I have briefly touched upon my reasons for thinking this in an article in Scrutiny,
September I933, and hope to be able to deal with the whole problem more
adequately in my forthcoming work on Some Economic A spects of Public Utilities.
I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 46I
what I have called the distinguishing characteristics of public

utilities were always found wherever monopoly was found and
never anywhere else. Then instead of enumerating or describing
the characteristics we might by a sort of mental shorthand
describe them collectively as " monopoly" without fear of being
misunderstood even by ourselves. We should simply be employing
a common figure of speech. We talk, for instance, of our objection
to the tsetse fly as a cause of sleeping sickness when what we
really object to is the trypanosomes that it carries; but nobody
thinks of quarrelling with this.
This defence breaks down, however, and the objection ceases
to be a mere academic quibble, if the thing that we really mean to
refer to is not an invariable concomitant of the thing we name as
its description. If, for instance, the causal agent of sleeping sick-
ness was not always found in tsetse flies and was sometimes found
in mosquitoes or fleas, then it would not do to say that the cause
of sleeping sickness was the tsetse fly. Certainly it would not do
just to set out to annihilate the tsetse fly if what we really wanted
to stamp out was the trypanosome.
5. It is significant that certain writers, notably Professor Pigou,
have chosen to distinguish public utilities not as monopolies
simpliciter, but as discriminating monopolies. This step, while
seeming at first sight to render void most of the above objections
to the use of the term monopoly, really abandons the whole case
in its favour. It is the fact of discrimination, not the fact of
monopoly, that is essential to the argument.
I think that a study of the form actually assumed by public
utility legislation will suggest that Professor Pigou is right in
selecting -the tendency towards discrimination as the distinctive
characteristic of public utilities; that is to say, I think that in
generall the primary cause driving legislators to interfere with
public utilities has been a dissatisfaction with the prices that
were being charged, or more often with the prices that might be
charged. But I think that Professor Pigou is wrong in linking
this up with the idea of monopoly. In straining after a trypano-
some he has swallowed a totally superfluous tsetse fly. I call this
particular tsetse fly superfluous, in the first place because I think
I Dr. Hugh Dalton and Professor Plant have both asked if it is not true that
some public utility legislation might aim at the prevention of merely extortionate
charges, i.e. of charges which gave an unusually large profit, but were nevertheless
not differentiated. I think that the hypothetical case must be admitted; but I
doubt very much if there have been many actual cases in which the charges of a
public utility tended to yield abnormal profits and yet to remain undifferentiated.
If such cases were the rule rather than the exception, public-utility regulation
would have been a much simpler affair than it is.
that discrimination is a much wider and more fundamental

phenomenon than monopoly, unless monopoly is so defined as to
embrace all types of enterprise except the Stock Exchange and
the auction room, which is certainly not the practice of Professor
Pigou. And I think that it is wrong in the second place to treat
discrimination on the part of public utilities as a " result " of such
kinds of monopoly as they do enjoy.
I have used the term discrimination, although I consider it
rather out of place in a scientific discussion. It is a term that has
no fixed meaning at all. The only sort of definition of it for which
any sort of universality can be claimed is that it means undesirable
forms of price differentiation. But what is undesirable in one case
is of course not necessarily undesirable in others.'
Let us provisionally define discrimination as the charging of
prices that vary among themselves where uniformity would be
preferred. Uniform prices are usually regarded as " natural," but
really they are a highly artificial phenomenon. The " natural"
tendency, if it is right to talk of natural tendencies at all in a
social science, is towards differentiated prices. It is only where
prices are held together by the artificial mechanism that we call
the market that uniformity ensues, except of course fortuitously.
If, then, there is a stronger tendency towards discrimination in
the public-utility industries than in other industries of equal
public utility, it is to be explained by reference to the forces which
fix the boundaries of markets. Anything that will cause anybody
both to desire and to be able to make two markets exist where
only one existed before will break down the safeguards of uni-
formity of prices.2
6. Let us assume, as is usual in discussions of this sort about
prices and as best fits the facts, that the initiative in price-fixing
is taken by the seller. Of course the conclusions built upon this
1 I prefer to avoid using the word " discrimination " not so much because it is
used rather widely in very different senses, although this is unfortunately the
case, but rather because it generally implies two notions that find no place in the
above argument, viz. (i) the notion of deliberate action on the part of the seller
(or whoever is the immediate fixer of prices) and (2) the notion that such action
is morally reprehensible, at least a priori. More detailed discussion of the implica-
tions of the term and of the term " differentiation " must be deferred to another
occasion.
2 It does not necessarily follow that either party to the bargain must deal in
more than one market. This is another reason for preferring not to use the word
" discrimination," which suggests that the same seller, or possibly buyer, deals
in more than one market. It is possible to imagine a case in which a seller S sells
a commodity to a buyer B at a different price from that charged by another
seller S' to another buyer B'. I should call this a state of price-differentiation
and consider it to come within the scope of a discussion of public-utility prices.
But I do not think that anybody would call it a case of discrimination.
1933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 463
hypothesis can afterwards be applied wtutatis mutandis to cases

where the buyer takes the initiative.
Let us take first the causes that are likely to make a seller want
to break down the mechanism by which uniformity of prices
would be assured. The most obvious cause need not detain us
long. The mere desire to make profits as large as possible will
encourage him to charge more than the average price whenever
he can get it.' Most textbook discussions assume that this alone
sufficiently explains the phenomenon of differentiation. But in
fact it does not.
The scope for profitable differentiation would usually remain
very narrow if it were not for overhead costs.2 In fixing prices, a
seller is governed primarily by the rule of accepting no item of
business that will not at least cover its costs. But " cost " in this
context must be interpreted to mean the expense that would be
saved if the business were refused, and this differential cost may
be much smaller than the average cost of all the items of business
transacted. The discrepancy is due to the existence of certain
costs which must be covered by the transactions of the under-
taking as a whole, but need not be covered by any particular item
of business. The greater the proportion of these overhead costs
to the total costs, the greater will be the gap between what some
items of business must bring in by themselves, and what all the
items must bring in on an average; i.e. the greater will be the
seller's motive for charging differentiated prices. The phenomenon
of overhead costs deserves more attention than it usually gets.
An adequate discussion of it would constitute a complete theory
of production. I do not propose to enter upon this task this
evening, but one or two things need to be said about the part
played by overhead costs in the theory of public utilities.
i. " Overhead "here is a purely relative term. Practically all

costs are both overhead and prime, according to the way in
which the item of business or unit of production is defined.
Costs can only be regarded as overhead with reference to
specific batches of commodities.
ii. The batches of commodities for which particular costs are
overhead may be produced or sold simultaneously or con-
secutively. Thus some costs appear to be overhead at a
moment of time, others only over a period of time. But
fundamentally both are phenomena of the same sort.
1 Whenever he can get it, that is, without incurring a net loss.
2 For more detailed discussion of this influence of costs, see my Price
of Germain Public Utility Usdertakiings, passim.
Failure to observe this has misled many writers on public

utilities, especially when they have been dealing with
depreciation and amortisation.
iii. The logical relationship between the idea of overhead cost
and the idea of joint cost appears to have been frequently
misunderstood, on both sides of the Atlantic. I would
prefer to try to explain public utility charges without
reference to joint costs, but not altogether for the reasons
given by Professor Pigou.
iv. The occultation of overhead costs by the derived concepts
of Increasing and Decreasing Returns is in my opinion
mischievous. It tends to substitute formulae for reasoning.
Increasing and decreasing returns are not primary economic
concepts. My objection is not so much that the boxes are
empty as that they are not boxes at all, but the shadows of
boxes.' The realities which cast these shadows are costs,
and any theory which is not directly based upon these
costs is predestined to inadequacy.
7. Let us turn to the limitations upon a seller's ability to charge

differentiated prices.2 As Professor Pigou has pointed out,3 this
depends upon two things-upon his power to sell to some buyers
at a higher price than others are paying, and upon his power to
prevent the more favoured customers from re-selling to the less
favoured. In more technical terms, it depends upon his ability to
do business in two or more of a set of markets between which
units of supply and units of demand are imperfectly transferable.
This sort of isolation of markets may result from any of three
different conditions which we may call Fortuitous, Undesigned,
and Intentional Hindrances to movement of units of demand and
supply. These terms will respectively designate the processes by
which markets are born isolated, achieve unintended isolation
through the action of governments,4 or have it deliberately thrust
upon them by (or for) dealers.
Fortuitous limitation of transferability exists when units of
demand cannot be transferred except at a significant cost from a
dearer to a cheaper market and units of supply cannot be trans-
ferred except at a significant cost from a cheaper to a dearer
market, independently of special human regulation.5
1 Vide the well-known controversy in The Economic Journal, I922 and I924.
2 i.e. not merely to the limitations upon a seller's ability to differentiate among
his own charges, still less to discriminate.
3 Vide Economics of Welfare, 3rd edn., p. 275 if. 4 Or other authorities.
6 The position of the line of demarcation between fortuitous and undesigned
limitation of transferability depends on the definition of " special " in this
Undesigned limitation of transferability exists where a govern-

ment or other authority hinders movement in this way, but not
with the primary object of facilitating differentiation of prices.
Intentional limitation of transferability exists where a dealer
(or authority) is responsible for the hindrances to movement, with
the intention of facilitating differentiation of prices.
8. In the public utility industries both the desire and the ability
of sellers to differentiate is considerable, because the extent of
overhead costs and the limitations to movement between markets
are both unusually great. The causes of this are largely of a tech-
nical nature, and can only be summarised here.
The chief causes of the large proportion of overhead costs are:
i. The technical necessity for plant of a type that can be

added to only in relatively large units.
ii. The peculiar nature of " octopoid " distributing plant.
iii. The special need for reserve capacity.
iv. The phenomena of the " peak," which often necessitate
considerable fluctuations in the use made of different
sections of the undertaking. But it is a mistake to treat
the peak as very important for all public utilities.
The principal conditions which permit isolation of markets are:

i. The physical conditions under which the products of most
public utilities are necessarily, or at least most conveniently,
supplied.
ii. The comparative ease of creating intentional hindrances to
movement between markets on the part of certain kinds of
groups of customers.
I do not think it appropriate to mention here the limitations to

movement which may be fostered directly or indirectly by public
utility regulation itself, since these can hardly be reckoned among
the reasons for the existence of that regulation.1
9. This, then, is the basis of the economic concept of public
utilities. It is simply that there are certain industries which have
a tendency to charge discriminating2 prices for their products.
The political concept is that the evils of regulation of these indus-
tries are outweighed by the evils of leaving them unregulated.
This is not a matter that we, as economists, can come to any
conclusion about. All that we can say is (i) whether this tendency
sentence. But it is undesirable to attempt a full discussion of the theory of
individualism in a footnote. Cp. note , p. 467.
1 Some writers do not appear to be troubled by this consideration.
2 The word is used here, and later, in the sense mentioned in paragraph 5.
is specially prominent in certain industries-i.e. whether there is

a case for the economic concept of a public utility; (ii) whether
the presence of this tendency would cause certain anticipated
effects; and (iii) whether preventive regulation would cause
certain anticipated effects. But the balancing of these effects,
and the decision that the one outweighs the other to such an
extent that regulation is desirable; this is the political case for
the public utility concept, and one upon which we cannot pass
judgment.
(i) The first question hlas already been answered with reserva-
tions in the affirmative; i.e. it has been said that there is a group
of industries in which prices are noticeably more differentiated
than in other industries of like public importance. There is, of
course, no real qualitative difference here, but the quantitative
difference is so great as perhaps to warrant its being regarded as a
difference of kind. The tendency to differentiated pricing exists
everywhere; but only in certain industries is it extreme.
The second and third questions, viz. those relating to the evils
of discrimination and of regulation respectively, do not strictly
come within the scope of this paper. But economics may be called
in evidence, although it is not the judge.
(ii) The chief objections that are usually raised against dis-
crimination are:
(i) It is considered unfair to those customers who pay the
higher prices.
(2) When the customers concerned are not final consumers
but industrial undertakings, it is considered to modify in
an undesirable manner the distribution of productive
resources in other industries.
(3) It is considered to encourage cut-throat competition,
which is disliked because it is believed to have bad effects
on continuity and reliability of service and to discourage
investment that is " socially desirable."
The first two objections are based on mere opinion. The last
also involves questions of fact, which cannot be settled by appeal
to historical evidence, as has been attempted by Sidgwick for
example, and by lesser writers since. Public utilities in their wild
state are almost as extinct as the dodo nowadays, and the pre-
history of their captivity is not over-well documented. The
deductive case for the inevitability of cut-throat competition can
be made very convincing, as Professors Clark and Davenport
inter alia have shown; but only on the assumption that the
managers of public utilities will act in that " perfectly competi-

tive " manner which normally appears to be an almost exclusive
speciality of stockbrokers, beaver-hunting savages, and mathe-
matical symbols.
But in any case I do not consider that questions of cut-throat
competition are the real points at issue. They are not what legis-
lation has primarily aimed at, even if some theorists think they
ought to have been. In fact, as any study of the American law
reports and the English statute book will show, the chief aim of
public utility regulation has been the control of price-differentia-
tion, or, if the less accurate terminology be preferred, the preven-
tion of discrimination. Whether this is a desirable aim or not is
a purely political judgment.
In considering these objections to laissez-faire in the public
utility industries I have deliberately omitted mention of certain
arguments that are very frequently advanced, but that are
not peculiarly relevant to public utilities. They are, in fact,
objections to laissez-faire in general. These socialistic objectio
as we may call them to distinguish them from those which do not
involve a rejection of the general thesis of individualism,' include
the following:
(i) The desire for " socially desirable " services that would
not be provided by unregulated private enterprise, such
as unremunerative bus services, transport at reduced
fares for workmen, postal services in country districts,
etc.2
(2) The desire for the profits of operation or of a share in
them, " for the relief of the rates " as it is often attrac-
tively phrased.
Not necessarily socialistic, but socialistic in some cases, are the
following:
(3) The desire to keep the regulated industry more up to date
than it would be under private enterprise.
(4) The desire to ensure the attraction of the " socially
desirable " proportion of productive resources into the
industry.
1 I do not believe that there is any thesis of individualism that is universally
valid. I think that particular actions can only be described as more or less
individualistic in nature, not absolutely as individualistic or otherwise. And,
therefore, I do not think it possible to conceive of a " general thesis of individual-
ism " or of socialism in the way in which a general thesis of anarchism or com-
munism might perhaps be conceived. The above phrase must therefore be under-
stood to mean the general thesis of individualism as this is commonly interpreted
in Europe and North America nowadays.
2 i.e. " discrimination," in some senses at least.
I do not propose to deal here with such motives. They form

part of the general case against individualism, with which the case
for public utilities, as I apprehend it, is incompatible.
(iii) Whether the results of regulation are better or worse than
those of laissez-faire in the public utility industries is also a matter
of purely political judgment, although it may be based on economic
evidence. The chief objections to regulation are:
(i) That it tends to hinder progressive management.
(2) That it may be used for levying hidden taxes on certain
sections of the community.
(3) That it may lead to the establishment of units of manage
ment of an uneconomical size.
(4) That it opens the way to undesirable political influence
on the conduct of industry.
(5) That it does not really remedy the evils that it deals with,
but merely gives them a legal status.
Perhaps the strongest argument of all would refer to what
disciples of Marshall might like to call the external, rather than
to the internal, diseconomies of public intervention.
The evaluation of these objections, and the comparison of them
with the objections to laissez-faire, is the office of the politician.
IO. When the case for the political concept has been settled,
that for the legal concept of public utilities may be considered. It
assumes that certain industries are to be specially dealt with by
the Government, and defines the way in which this is to be done.
It is a matter for the legislator, who principally has the choice be-
tween permitting and forbidding private operation. Where private
operation is permitted, it may be controlled as in America or as
in England, or, conceivably, in other ways. That is to say, there
are other ways of dealing with public utilities in the political sense
than by making them public utilities in the legal sense. Therefore,
if we are speaking as legislators we may legitimately regard public
ownership as an alternative to, and even as the opposite of, public
utility status. But if we are speaking as politicians, we shall not
regard this as an accurate opposition. The opposite of public
utility status as a political concept is not public operation, but
the absence of a need for special regulation altogether. The case
for the political concept of a public utility is the case against
laissez-faire in certain industries, not the case against municipal
ownership or any other form of special control.
ii. I should like at this point to anticipate the possible criticism
that this after all is merely a strife about words, as so many
scientific discussions are, and that if wandering like Newton along

the shore of the ocean of truth we have happened to pick up a
more interesting pebble than ordinary, it does not matter much
whether we call it a Public Utility or an Oeffentliche Unternehm-
ung or anything else so long as we call it something.
I am inclined to agree with the latter part of this statement.
But I think that it would be misapplied as a criticism of the
preceding argument. I do not think that all arguments referring
to " mere " definitions and other verbal questions are necessarily
unimportant. A science may not altogether fancifully be regarded
as nothing but a collection of definitions. That is to say, one of the
useful things that a science does is to divide things up into groups
and give each group a symbol, thus saving a good deal of work for
those who deal with these things afterwards. But the process of
classification is quite useless if the groups are not homogeneous-
homogeneous, that is, when judged by criteria suitable to the
purpose in hand.
Now I would agree that it does not matter very much what
symbol is chosen for representing a particular group. I do not
think that it is absolutely a matter of indifference, because we are
not the only people who use the language from which we usually
choose the symbols. In some ways this is a pity. Economics
might avoid many difficulties if it took a leaf out of some other
scientific books and launched a campaign of depopularisation,
calling its concepts by numbers like the stars, or by letters like
chemical elements, or by the signs of the Zodiac; or at least by
strange new names that do not look like ordinary speech, after
the manner of Professor Irving Fisher. Perhaps it is one of the
minor faults of economics that it has been too timid in inventing
new names to fit new ideas. Certainly it has been rather unenter-
prising in accepting the gift of such an unsatisfactory piece of
jargon as the term " public utility."
It is easy to see how the term came into existence. For those
who were concerned with the special regulation of certain indus-
tries under an individualistic regime, the public interest in the
industries was naturally their most remarkable, or at least their
most advertisable, characteristic. But for the economist, the
public utility of public utilities is a matter of secondary impor-
tance. For the economist, the peculiar and interesting thing about
them is their habit of differential charging; and the term " public
utility " fails utterly to indicate this.
On the other hand, we must remember that the term does seem
to have the popular ear. We even meet it in Hansard. It would
be futile for us to emulate Canute and take to our arm-chairs

against the sea of usage. All the existing discussions of the matter
from the economic point of view use the term public utilities.
We even have-horribile diclu-textbooks and journals and chairs
of " public utility economics." If general usage insists that the
term has this meaning when it already has two quite distinct
technical meanings besides the non-technical, then we can do little
about it. It certainly would be very pleasant if economists had
sufficient influence to be able to make people gradually drop the
word in this connection and talk about multi-priced commodities
and multi-pricing industries or something quite uniambiguous
like that instead. Until the world at large is disposed to do' this,
it remains a moot point whether it is worth while for us to do so in
our private discussions. . . . But it is quite true that all this
is relatively unimportant.
This, however, does not mean that all matters of nomenclature
are unimportant. It may not matter what we call a thing, but we
must know where it belongs. Even the young lady who did not
mind whether the poet called her Lalage or Doris made the
stipulation " Only call me thine." In Johnsonian terminology,
we may talk as other people do so long as we clear our minds of
cant. It seems to me that there is a hint of cant, for example, in
the argument that coal mines or banks or dairy combines should
be made public utilities. It seems to me that none of these possesses
the fundamental characteristic that distinguishes admitted public
utilities from other undertakings, and that the attempt to deal with
them indiscriminately for purposes of government control should
be resisted.
To recapitulate, I consider that this fundamental characteristic
is an unusual tendency towards price-differentiation. There is not
a whit more than this in the strict economics of the matter. A
secondary characteristic, which some would include in the defini-
tion of the economic concept but which is better reserved for that
of the political concept, is the property of being of considerable
utility to the public. I do not mean that there is no tendency to
price-differentiation elsewhere. It is a universal tendency; but it
is usually overruled by other tendencies. Neither do I mean that
some industries are of no utility to the public. All that I mean is
that some industries are commonly reckoned of greater public
utility than others.
Thus some of the factors that bear on the case for even the
economic concept of a public utility are indeterminate or at least
variable. This will not appear surprising if we reflect that this
I933] THE ECONOMIC CONCEPT OF A PUBLIC UTILITY 47I
case must ultimately be expressed so as to answer some such

question as: Would public utilities if uncontrolled exhibit results
significantly different from the ordinary results of individualism ?
And the answer to this depends, of course, on what is meant by
" significant difference " and by " ordinary result."
I2. The economic concept of a public utility is both narrower
and more fundamental than the political and legal concepts. It
is more fundamental because the others are based upon it. It is
narrower because they are not based upon it alone. The economic
concept asserts that certain industries differ from others in a
particular way. The political concept asserts that because they
are thus different, they must be regulated. That is to say, the
political concept implies the additional notion that the evils of
regulation are less than the evils of laissez-faire as far as these
industries are concerned. And the legal concept asserts that
because they have to be regulated, they shall be called public
utilities and subjected to the treatment prescribed to public
utilities in certain statutes. That is to say, the legal concept im-
plies the further notion that the best way of regulating these
industries is that which has been adopted in America. But
whether they are regulated in this fashion or not, i.e. however the
case for the legal concept may be settled; and whether or not it
is felt that they need any special regulation at all, i.e. however
the case for the political concept may be settled; the case for the
economic concept remains, to be settled according to purely
economic criteria.
In considering our verdict we shall ask how far the suggested
definition is a true and complete description of all the industries
on our list; whether it relates to all the public utilities and
nothing but the public utilities.
One set of exceptions has already been mentioned. De minimis
non curat lex, and some " discriminating" industries are omitted
merely because their products are thought to be so unimportant
that it does not matter how they charge for them. Many sorts of
personal service fall under this condemnation. The charges for
other personal services, such as those of the recognised professions,
are exempt from government regulation because they are regu-
lated by the sellers themselves in a way that the public regards as
acceptable. If they did not thus regulate their charges, doubtless
lawyers and doctors would take their place among the public
utilities along with gasworks and tramways.
Another form of differentiation, where the markets are separated
by national boundaries, is not usually reckoned to put the indus-
G
tries practising it among the public utilities because dumping is,

by the very nature of the case, usually a matter over which no
single legislative authority has jurisdiction.
One rather anomalous case remains for consideration-retail
trade, other than that of the kinds already discussed.' Perhaps
this is excluded from public utility regulation because retailers
practise a sort of self-regulation similar to that of the professions
and the remaining price-differences are usually negligible in com-
parison with the difficulties of regulation from outside.
I3. All this goes to expose the error of the notion that the
concept -of a public utility has a fixed connotation. Professor
Glaeser has applied to it an illuminating phrase in describing it
as a fixed concept with a changing content. Many kinds of cir-
cumstance may conspire to create new public utilities. They may
be created simply by a change in opinion. If, for example, we all
went mad and decided like the Germans to regard opera as a
national necessity,2 some theatres would become small-scale
public utilities. Or they may be created by technical changes,
such as changes causing an increase in the proportion of overhead
to prime costs. Or, since it is entrepreneurs' and not " social"
costs that bear upon this matter, a conversion of prime into over-
head costs might be brought about by legislation alone. Again,
new public utilities might be created by an increase in the facilities
for dealing in isolated markets, whether this was due to policy or
accident.
Similarly, any of the recognised public utilities might be
abolished by analogous changes. And since the whole system of
public utility regulation is essentially a patch on the coat of many
colours that we call individualism any general discarding of that
garment would, of course, do away with public utilities altogether.
For it is important to remember that the public utility concept
by no means covers all cases of regulation.
1 i.e. other than in the railway, tramway, electricity, gas, water, postal,
telegraph, telephone, and allied industries. 2 See note I, p. 458.

Economic Concept of A Public Utility

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The Suntory and Toyota International Centres for Economics and Related Disciplines

The Economic Concept of a Public Utility

The Economic Concept of a Public

SOME justification may seem to be needed for my choice of a

cerned this evening. It is the most fundamental of the three, and

i. The following kinds of enterprise are commonly included

3. Let us proceed to ask what the special characteristics are

pioneer work of Cournot, Edgeworth's elegant fragments, and

what I have called the distinguishing characteristics of public

that discrimination is a much wider and more fundamental

hypothesis can afterwards be applied wtutatis mutandis to cases

i. " Overhead "here is a purely relative term. Practically all

Failure to observe this has misled many writers on public

7. Let us turn to the limitations upon a seller's ability to charge

Undesigned limitation of transferability exists where a govern-

i. The technical necessity for plant of a type that can be

The principal conditions which permit isolation of markets are:

I do not think it appropriate to mention here the limitations to

is specially prominent in certain industries-i.e. whether there is

managers of public utilities will act in that " perfectly competi-

I do not propose to deal here with such motives. They form

scientific discussions are, and that if wandering like Newton along

be futile for us to emulate Canute and take to our arm-chairs

case must ultimately be expressed so as to answer some such

tries practising it among the public utilities because dumping is,

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