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130 IRET Congressional Advisory 1 (2002)

handle is hein.taxfoundation/iretcgadv0127 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. June 3, 2002 Advisory No. 130 THE POSTAL SERVICE: A MONOPOLY THAT LOSES MONEY The Postal Service is running large and growing deficits. At the end of June, the price of a first class stamp will rise from 34 cents to 37 cents, an 8.8 percent increase, to restore fiscal balance. At the end of May, the members of the National Association of Letter Carriers approved a five year contract with the Postal Service that incudes a 7.1 percent real wage increase over the period - it comes on top of cost of living increases - with the first step increase of 1.8 percent retroactive to November 17, 2001.1 Clearly, more postage rate increases are in store. The Postal Service Transformation Plan recommends that the Postal Service be converted into a Commercial Government Enterprise and allowed to expand its product lines and operations to reduce its projected deficits.2 Higher volume, it claims, would make it easier to cover its many areas of fixed costs. It seeks to offer additional products and services to leverage its exempt monopoly, and what the proposed expansion would do to change the situation. Monopoly profits: Now you see 'em, now you don't! Most people think of monopolies as powerful companies that earn large profits, or at least larger profits than firms The Postal Service Transformation Plan recommends that the Postal Service be converted into a Commercial Go vern ment Enterprise and allowved to expand its product lines and operations to reduce its projected deficits... B efore sutch changes are adopted, .one mnight ask wvhy the Postal Service is losing money in sp)ite of its statuts ais a government sanctioned tax-exempt monopoly, and what the proposed expansion would do to change the situation. franchise and increase utilization of its many retail outlets, processing operations, truck fleets, and route carriers. Before such changes are adopted, it would be wise to look at how the Postal Service is handling its current operations, and to see if expansion is likely to generate the financial benefits anticipated by the Postal Service. In particular, one might ask why the Postal Service is losing money in spite of its status as a government sanctioned tax- in competitive industries. (See charts 1 and 2 in the Appendix.) Even with monopoly power, however, there is a profit maximizing price, above which volume will decline to such an extent that it will result in lower revenues and profits. Monopoly profits are finite. Furthermore, not all monopoly situations lead to monopoly profits. There are two situations in which a monopoly can lose money. One is weak demand; the other is high costs. In both cases, costs exceed revenues. (See chart 3 in the Appendix.) Suppose the monopoly is well managed and efficient, and that it obtains its inputs at the lowest possible cost in competitive factor markets, but the demand for its product is too weak to cover costs. The public simply does not value the product highly enough to pay for it. Alternatively, suppose that the monopoly faces higher than normal costs. Perhaps the monopoly is 6 - A * I *gg~ 6 ~ ~g6 ~ge

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