Drawback of inadequate regulation: Paying monopoly profits for a privatized public good

Economist Tyler Cowen posted this link today on the Marginal Revolution web log. It is an article wherein he puts forward his views on the privatization of residential water supply in the Third World. He advocates full freedom by the private company to price its good. His argument goes:

And no, I don't mean a water concession with a price regulated by the government, I mean true laissez faire in water supply. No price regulation, no rate of return regulation, no government ownership of assets, no political pressure to keep prices low. Water companies should be allowed to maximize their profits, and because supplying water is nearly always a monopoly, they should be allowed to make monopoly profits. I know the idea sounds crazy--to an economist, water supply is a classic "natural" monopoly--but on closer inspection the other alternatives might be worse…..

….Let's say the new water prices were so high as to capture all the benefits that buyers would receive from the new supply of water. We can expect much lower rates of diarrhea and other diseases, if only because the water supplier can charge more for cleaner and safer water.

I beg to disagree. Granting monopoly profits to private water companies does not mean they will start making drastic improvements on water delivery. This goes against our long experience in many privatized companies granted full laissez faire freedom by government. Allowing monopoly profits does not automatically lead to improved service delivery.

A private, for-profit company’s objective is first and foremost to make a profit. If the company’s shareholders happen to be of the shareholder value maximization school, they will want to maximize profits first and foremost.

On that note, why shouldn't an unregulated private water company use its excess profits instead to buy the local electrical utility, and monopolize that as well? And why not use the excess profit to lobby the government to do away with regulation in electricity as well? Before long, it will have bought everything and monopolized everything. With any luck, it will make up for it by offering bundled discounts to suffering consumers.

Privatization without regulation is worse than no privatization. At least, government can potentially be more accountable to the people, given that the government periodically needs to renew its mandate via elections. This is especially important when the service provided is a public good, like that of water delivery.