The utility market used to be competitive, then municipalities began "licensing" them, which eventually led to the current state of affairs.[1] Even lighthouses, which have large externalities, can be built and operated without government intervention, as they did for a very long time.[2]
That Wikipedia link seems to support the claim that lighthouses actually failed to operate well without government intervention:
"Eventually, all these rights were withdrawn or bought up by the authorities because the total light dues that had to be paid by ships were too high as a result of rent-seeking activities of these so-called private providers of lighthouses. Barnett and Block (2007) qualify these critiques by showing that private lighthouses are possible, but do not show up in the historical record."
The utility market moved towards a regulated model in the very early days of electric and gas transmission. There were lots of really good reasons for this around safety, universal service and public good. Most states today have a model where delivery is tightly regulated, but electricity generation is a competitive marketplace.
At the end of the day the government exists to serve the public interest.
Correct me if I'm wrong (because I'm not very familiar with this issue), but I gather that the tightly regulated part - power transmission and distribution - suffers greatly from decaying infrastructures due to lack of investment and maintainance. It seems to be at the brink of collapse in some places.
I'm not against government regulation of essential infrastructures, but we should be aware of the fact that it's very difficult to get right, particularly (but not only) in a political climate where government spending is such a divisive issue.
Agreed. Regulatory regimes aren't a magic wand -- they are tools that need to be wielded appropriately.
I think that any capital intensive infrastructure becomes more difficult to manage effectively as it ages. Even relatively rich and well maintained infrastructure like the US Interstate system has severe design flaws (35-year lifespan bridges that are 40 years old) that make life more complicated.
Government exists to organize society. Feudalism served its lords, monarchy served its kings and nobles, empire its emperors, and democracy, occasionally, its people.
Government has served a variety of masters in the past - but rarely purely the public interest.
It should serve the public interest, which is good enough for policy debates.
This is absolutely false. Policy debates universally assume that it will serve the public interest, despite experience and extensive research in public choice economics.
The result is that we get policies that aren't crafted to be robust to corruption and bad incentives, and that gets us to the state we're in today.
Any policy debate should include discussion of what could go wrong, what the effects of that would be, and what we could/should do to prevent that.
I guess I wasn't clear enough. My point is that, in a policy debate, whining about how government has not served the public interest in the past is counterproductive except insofar as it helps to prevent all the crap you enumerated. What we're both saying is that policy debates are about how to write policies that actually serve the public interest, instead of falling into some perverse incentive trap.
At the end of the day the government exists to serve the public interest.
I would add to that that the free market definitely does not exist to serve the public interest, as far too many fans of it tend to forget.
Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all. -- John Maynard Keynes
There are places where the free market is ideal - utilities, such as Internet service (which requires either right of way on private land or permission to transmit and receive without interference on public airwaves) is not one of them.
Utilities, and communications which rely on scarce distribution channels as you mention are not, and will not be truly free markets and should be regulated.. how tightly they should be regulated is up to interpretation. IMHO such utilities should not be allowed to be owned by companies that have inherent market verticals and/or conflicts of interest that do not serve the public good. Time-Warner is a prime example.
As far as outside utilities, and similar services... I feel the government's role should be to limit monopolies, not eliminate, but only so much as to allow for competition to happen. The rediculous extent of IP protectionism, specifically patents on design, algorithms and business processes are counter to that. Corporate personhood as a legal concept is against that. For that matter, corporations should probably instead have limits on unutilized/underutilized assets for a given length of time, and enforce distribution back to investors in those cases.
A free market is a market is one where upstart competition can generally succeed, and entrenched incumbents are regularly surpassed, or continually growing.
[1]http://www.econlib.org/library/Enc/ElectricityandItsRegulati...
[2]http://en.wikipedia.org/wiki/The_Lighthouse_in_Economics