South-Western EconNews

US Postal Service raises prices...again

Subject

USPS to raise price of stamps

Topic

Monopoly

Key Words

USPS, price increase, stamps, monopoly

Full Article

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Reference ID: CJ140643026

News Story

Beginning on January 8, 2006, the price of a United States domestic first-class stamp rose by two cents, from 37 to 39 cents. It is the first increase since 2002, when the price of a stamp rose from 34 to 37 cents, and a significant increase since the first stamp, which cost 2 cents, was issued in 1885.

While demand for USPS services has been falling in recent years, the price increase results from a new government regulation requiring the USPS to hold $3.1 billion in an escrow account this year—most notably to cover future costs. The new rates were set by the USPS Board of Governors late last year, and reflect the point at which the USPS can earn a “normal” profit.

As a result of the price increase, post offices around the country were swamped with requests for new stamps, or additional 2-cent stamps to help people use up their stashes of 37-cent stamps.

Questions

1.	The USPS is regulated as a “natural monopoly.” What does it mean to be a natural monopoly, and why is the USPS a likely example of it?
2.	What does it mean when the USPS argues that it must raise prices to continue to earn a “normal profit?”
3.	If the original cost of a stamp, 2 cents, was adjusted for inflation over time, that same stamp would cost 41 cents in 2005. What, if anything, does that say about the ability of the USPS to regulate its own costs?

Source

Paul Nelson. “Stamp increase packs post offices.” The Sun News (Myrtle Beach, South Carolina) (via Knight-Ridder/Tribune Business News). Jan 8, 2006

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