The economic and moral benefits of ending Canada’s postal monopoly

Currently, Canada Post holds a monopoly on the delivery of first-class mail in Canada. The Canada Post Corporation Act affords it the “sole and exclusive privilege of collecting, transmitting, and delivering letters” within the country. Exceptions to this rule are limited.

There are several economic reasons for liberalizing postage in Canada by ending the Crown corporation’s monopoly. Since they are sheltered from market competition, for instance, monopolists can raise prices higher than firms in a competitive market could. The firm’s additional revenue stemming from its unique ability to participate in its market is termed monopoly rents. These rents reflect the difference between the firm’s prices and opportunity costs, which tend to converge in competitive markets as companies undercut each other until the process becomes unprofitable.

Sensing this advantage–that is, the ability to extract additional rents via monopoly status–unions typically bargain for some portion of these rents in the form of higher wages, favourable working conditions, and so forth. Nevertheless, this increases the firm’s costs.

Canada Post faces a difficult financial position because it allowed unions to absorb these rents. However, the emergence of newer, more efficient technologies eroded its ability to sustain higher levels of worker compensation. It manages these hardships by reducing costs by diminishing services, which has the counterproductive effect of exacerbating declining demand for its product. For instance, it announced plans to end mail delivery to urban homeowners and it has increased its stamp prices to offset its financial difficulties.

Importantly, though, Canada Post has the ability to impose these reforms only because consumers do not have a viable alternative for first-class mail delivery and other essential postal services.

By opening the postage market to competition, firms would need either to offer services closer to cost or offer better service than their competitors. Theory suggests, and empirics confirm, that liberal reforms in would reduce prices and increase the amount of options available to consumers, which, in the case of Austria, the Netherlands, and Germany–countries that liberalized their postal markets–is true.

Proponents of Canada Post’s monopoly suggest that it provides equal rates across the country, which allows the outfit to provide “affordable mail service” to rural Canadians. Yet, it is not entirely certain that competing firms could not offer cheaper rates in these areas than Canada Post. Furthermore, it is not necessarily clear why the postage industry has an obligation to equalize rural and urban Canada in the first place.

The monopoly on mail service in Canada also adversely affects free speech. In early March 2014, Canada Post apologized for delivering offensive pamphlets prepared by the People’s Gospel Hour to thousands of Labradorians. The mail-outs quoted the Bible in an attack against homosexuality. These situations raise an ethical dilemma about Canada Post’s ability to act as both a conduit of Canadian values and a service-provider.

Canada Post is a crown corporation chartered by the Canadian government, which promotes certain values and, therefore, it cannot sensibly deliver mail that is questionable in content. Conversely, it is the only firm permitted to deliver certain documents and packages and it cannot refuse certain mailing orders without violating freedom of speech (at least theoretically).

Ending the mail monopoly, and thereby allowing private individuals and firms to deliver letters, would solve this quandary – neither Ottawa, nor Canada Post, would have to implicitly support the dispersion of bigoted materials in order to safeguard freedom of speech and censored groups could seek alternative options for delivering said material. In other words, Canada Post employees would not be the ultimate arbiters of what is “acceptable” for delivery.

In any case, Canada Post’s monopoly is both uneconomical and ethically challenged, and allowing competitive forces to govern the Canadian postal market is a viable alternative. Unlike the current structure, for instance, private competition could allow for better quality and more affordable service, not to mention that, most importantly, it would quash concerns about the government’s role in deciding between decency and free speech.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Equalization, Incrementalism, the Unlikeliness of Rapid Reform

Equalization is a staple of the Canadian Dominion. Policymakers in the 19th century designed and implemented it to ensure that government provided equal services throughout the country and achieve greater balance between the provinces (or, as they were at the time, regions). The rationale is that small provinces, like Prince Edward Island (PEI), should be able to offer the same quality of public services as larger provinces that have greater fiscal capacity. Ottawa collects revenue from each province, based on a complicated formula that takes into consideration income levels, economic growth, and a swath of complex variables, and then redistributes it to those provinces in need.

The structure of Canada’s equalization program results in wealthier provinces contributing to poorer ones. This year, for example, Ontario, Quebec, New Brunswick, Nova Scotia, PEI, and Manitoba–colloquially referred to as the “have-not provinces”–will receive equalization payments, while the remaining four provinces–the “have provinces”–serve as their creditors.

Equalization’s current structure receives a great deal of criticism from both provinces that receive payments and those that provide a net contribution. Although this is a generalization, some believe that the formula no longer works and requires substantial reform. However, there is a disparity between defining the problem and delineating solutions to fix it. In Eastern Canada, for example, critics indicate that the program does not distribute enough wealth throughout the region, whereas those in Western Canada–where three of the four “have provinces” are located–argue that subsidizing the “have-not provinces” is unfair. In fact, some intellectuals question its constitutionality.

The inability to accurately define equalization’s most serious deficiencies precludes the capacity to solve them. For recipient provinces, including natural resource revenues in the equalization formula would increase the scope of its distributional effect. This is problematic, however, as it could also discourage creditor provinces from developing their natural resources (or, much less damaging, it would reduce their total revenue). Furthermore, including natural resources disproportionately penalizes the provinces that rely on developing them.

Conversely, those opposed to equalization argue that eliminating it or reducing its overall scope. Unfortunately, although this would benefit the “have provinces,” it would be severely damaging for those receiving the transfer payment each year–at least in the short-term. Not only would it reduce the size of federal transfer they receive, but also it could encourage residents of recipient provinces to migrate toward the more affluent West, which would only exacerbate the current migratory trend.

Reforming the Canadian equalization programme is difficult: neither those supporting nor opposing it will accept facing negative externalities of whichever reform route the government chooses. Solving this problem requires alternative solutions and, likely, a tremendous compromise between both sides. Alas, it might be better to transfer wealth directly to individuals, rather than provincial coffers, where bureaucratic excess erodes the government’s ability to effectively distribute it to individuals and families.

Ultimately, though, significant reform is unlikely and incrementalism may very well be the only option.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Who Does New Brunswick’s Recently Introduced Forestry Policy Benefit?

New Brunswick’s (NB) provincial government announced recently a plan called, “Putting Our Resources to Work: A Strategy for Crown Lands Forest Management,” which bolsters the province’s declining forestry sector. Specifically, it will increase the amount of crown land available for harvesting by nearly 20 per cent. The government asserts that removing and processing additional wood will create jobs by encouraging additional investment in the area.

However, while the plan seems logical, closer analysis reveals a great degree of uncertainty about its potential to succeed.

The forestry sector, for instance, has undergone major technological advancements that result in more capital-intensive investment, as opposed to labour-intensive. The policy may very well encourage more investment, yet, it might flow into machines, instead of workers. Therefore, although the number of mills and employees in the province’s forestry sector has decreased, it does not necessarily indicate that the amount of harvested lumber has. The ability of this policy to create jobs is limited, not to mention optimistic (however, the amount of public land that the provincial authorities are opening to corporations is very generous). As a result, while technological advances continue to make the industry more efficient, they also give reason to doubt the government’s expectation of increased demand for workers.

NB’s provincial government addressed public concerns regarding conservation efforts by committing double the amount of protected land in the province. What it failed to mention, however, was making these promises in 2012 and scheduling them to take effect in 2014. Consequently, the government is only promising an additional 6,000 hectares of Protected Natural Areas (PNA), not nearly as much as the 135,000 hectares it claimed. Inside PNAs, there is no forestry activity of any kind; yet, key elements of sustainable environmental planning, such as buffer zones along rivers, remain outside this designation. Hence, there is still a great deal of concern about the adverse effects of additional harvesting and processing in NB forests.

In addition, there is uncertainty about the magnitude of positive spinoff. For instance, while the demand for private wood will likely increase, larger firms are no longer required to purchase from private companies. The cost advantages of harvesting crown land and the increasing ability of large companies to do so illustrates exacerbates this effect. Much of the private sector has been struggling to remain profitable and it is difficult to say how much of a boost private woodlot demand will see from greater forest industry investment in the area.

NB’s new forestry plan, announced just two years after the provincial government released a ten-year plan, suggests altered motivations. Public opinion regarding the former plan was largely positive, yet, the province’s new approach is unfavorable toward public input. One year of consulting with public organizations, researchers, and experts occurred before finalizing the 2012 plan, however, this time, the government did not seek external advice or opinions.  Furthermore, while smaller firms have struggled to compete, bigger firms have political influence that allows them to bargain for more rents. Perhaps, then, the province’s new strategy has less to do with creating economic growth and more to do with convincing bigger firms to stay. Indeed, their exit could cause the province a significant amount of economic distress.

In any case, this policy’s long-term approval by New Brunswick residents will presumably depend largely on whether it acts as a subsidy to the firms that lobbied for additional rents or as a true expansion of industry opportunities resulting in economic growth for the province.

Rachel Lowe is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute