Do Economies of Scale Exist in Private Protection?
Evaluating Nozick's "Invisible Hand"
Originally published in Journal of Private Enterprise
Robert Nozick argued that private protection services produced in an environment without regulatory oversight would lead to a natural monopoly. This argument suggests that advantages in economies of scale incentivize protection firms to concentrate where no regulatory authority exists. If modern private security firms are somewhat analagous to protection agencies, we should observe more concentrated, larger firms when the industry is left without regulatory oversight and more numerous, smaller firms when this industry is heavily regulated. On the contrary, recent evidence suggests that private security firms become larger and the number of firms declines as regulation becomes more stringent.