Government-granted monopoly

In economics, a government-granted monopoly (also called a "de jure monopoly") and the monopoly to be served under government is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. As a form of coercive monopoly, government-granted monopoly is contrasted with a coercive monopoly or an efficiency monopoly, where there is no competition but it is not forcibly excluded.

"Franchise (rail)" redirects here. For the process as applied in the United Kingdom, see Rail franchising in Great Britain.

Amongst forms of coercive monopoly it is distinguished from government monopoly or state monopoly (in which government agencies hold the legally enforced monopoly rather than private individuals or firms) and from government-sponsored cartels (in which the government forces several independent producers to partially coordinate their decisions through a centralized organization). Advocates for government-granted monopolies often claim that they ensure a degree of public control over essential industries, without having those industries actually run by the state. Opponents often criticize them as political favors to corporations. Government-granted monopolies may be opposed by those who would prefer free markets as well as by those who would prefer to replace private corporations with public ownership.

History

Under mercantilist economic systems, European governments with colonial interests often granted large and extremely lucrative monopolies to companies trading in particular regions, such as the Dutch East India Company.

Today, government-granted monopolies may be found in public utility services such as public roads, mail, water supply, and electric power, as well as certain specialized and highly regulated fields such as education and gambling. In many countries, lucrative natural resources industries, especially the petroleum industry, are controlled by government-granted monopolies. Franchises granted by governments to operate public transit through public roads are another example.

Patent
Main article: Patent

A patent is a set of exclusive rights granted by a state or national government to an inventor or his/her assignee for a limited period of time in exchange for a public disclosure of an invention.

The procedure for granting patents, the requirements placed on the patentee, and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. Typically, however, a patent application must include one or more claims defining the invention which must be new, inventive, and useful or industrially applicable. In many countries, certain subject areas are excluded from patents, such as business methods and mental acts. The exclusive right granted to a patentee in most countries is the right to prevent others from making, using, selling, or distributing the patented invention without permission.[1]

Main article: Copyright

Copyright is a legal right created by the law of a country that grants the creator of an original work exclusive rights for its use and distribution. This is usually only for a limited time. The exclusive rights are not absolute but limited by limitations and exceptions to copyright law, including fair use. A major limitation on copyright is that copyright protects only the original expression of ideas, and not the underlying ideas themselves.

Trademark
Main article: Trademark

A trademark or trade mark[note 1] is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities.

Trademarks can act as a form of consumer protection that lowers the transaction costs between a buyer and seller who are not personally acquainted.[2]

Directly mandated

Governments have granted monopolies to forms of copy prevention. In the Digital Millennium Copyright Act, for example, the proprietary Macrovision copy prevention technology is required for analog video recorders. Though other forms of copy prevention aren't prohibited, requiring Macrovision effectively gives it a monopoly and prevents more effective copy prevention methods from being developed.

Background of the role of government

The theory of rent seeking - that is, artificially created socially harmful competition for scarcity due to scarcity - can be caused by monopolies, foreign trade restrictions and state subsidies.[3] Governments can also create monopolies in order to reduce inefficiency of market as: scarcity of resources, reduced wealth-creation, lost government revenue, heightened income inequality, incomplete markets.[4] The reason also can be simply as economies of scale, as well as the government can use its power to gather influence on the market by regulation.

Companies can also cause rent seeking: a company has a monopoly power – there is no other competitor on the market – then the company can limit the amount produced, so creating scarcity. Therefore, it can raise the price in principle, so it can earn more than its costs, or what other factors could make. While monopolies, for example, can be considered a market failure as prices rise and output falls, monopoly creation is not always a strict market phenomena. Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued. Government granted monopolies comprise a fair portion of monopolized industries.[5]

Natural monopolies

A natural monopoly is when a company can serve the market most efficient way. This is usually due to fixed costs and variable costs. If the fixed costs are very high, it will result in it not being effective for more than one company on the market. For example, if we consider the electricity supply of a city, it is not worthwhile for anyone to build a second tram network. Since the (fixed) cost of network construction is too high, the expected return is not worth the investment. (Of course, if not only one company can supply the wires but anyone, then the fixed cost will disappear and competition can be realized.) It follows from a significant proportion of fixed costs that, in the case of a natural monopoly, the company provides a declining phase of the average cost curve.

According to Arnold Harberger the loss of deadweight from monopolies in the US manufacturing industry is only 0.1% of GNP, so the real problem is not the existence of monopoly.[6] The real problem is the social costs. These are not only the amount of deadweight loss and the cost of lobbying companies, but also the efforts that consumers make to prevent this.[7] Indirect costs that are caused by rent seeking in other markets should also be taken into account. For example, if there is a need for more economists because of lobbying activities, the cost of not having many other professions or the cost of competing in offices for bribes. Interestingly, however, bribes alone are not a social cost, just a transfer from certain groups (renters) to other groups (clerks).

In the case of natural monopolies in private hands, regulation can be introduced to break monopolies. The government can regulate prices in certain sectors where natural monopolies develop. This can be done directly by setting the price (for example, the price of rail or gas) or by regulating the return (for example, in the case of telephone services). Whatever method is used, the goal is to lower prices to cost levels. By reducing the price, the rent seeking and the deadweight loss are also reduced or eliminated. In addition to natural monopolies, there are monopolies created by companies themselves through acquisitions and mergers. They do it due to the fact that in addition to decreasing average costs (economies of scale), there may be other reasons for this. There is no rent seeking in the race because the companies offer each other until the prices exceed the costs. Their purpose is to agree on a higher price, thus dividing the annuity. However, they cannot trust each other either - in such a cartel, in the short term, each company has the interest of reducing the price, acquiring the customers of others, and thus getting close to all annuities. This is the easiest way for companies to solve this distrust when they unite and then share the annuity in proportion to the shares. Preventing such cases is a competition policy that prohibits the creation of price cartels and only allows mergers if it does not entail the risk of a monopoly power.[8]

Alternative interpretation

Dennis Thompson notes, "Corruption is bad not because money and benefits change hands, and not because of the motives of participants, but because it privatizes valuable aspects of public life, bypassing processes of representation, debate, and choice."[9]

Criticism

Opponents of government-granted monopoly often point out that such a firm is able to set its pricing and production policies without fear of breeding potential competition. They argue that this causes inefficiencies in the market place, such as unnecessarily high prices to consumers for the good or service being supplied. It has been argued that government-imposed price caps might avert this problem.

Examples

See also

Notes
  1. The styling of trademark as a single word is predominantly used in the United States and Philippines only, while the two-word styling trade mark is used in many other countries around the world, including the European Union and Commonwealth and ex-Commonwealth jurisdictions (although Canada officially uses trade-mark pursuant to the Trade-mark Act, trade mark and trademark are also commonly used).

References
  1. Patents: Frequently Asked Questions Archived 25 February 2013 at the Wayback Machine, World Intellectual Property Organization, Retrieved on 22 February 2009
  2. Landes, William; Posner, Richard (2003). "7". The economic structure of intellectual property law. p. 442. ISBN 978-0-674-01204-2. Retrieved 18 August 2009. - Subheading: The Economic Function of Trademarks p 166
  3. Tullock, Gordon (2001), "Efficient Rent Seeking", Efficient Rent-Seeking, Springer US, pp. 3–16, doi:10.1007/978-1-4757-5055-3_2, ISBN 9781441948663
  4. "IMF - Rent Seeking and Endogenous Income Inequality" (PDF).
  5. PURNANANDAM, AMIYATOSH; WEAGLEY, DANIEL (14 January 2016). "Can Markets Discipline Government Agencies? Evidence from the Weather Derivatives Market". The Journal of Finance. 71 (1): 303–334. doi:10.1111/jofi.12366. ISSN 0022-1082.
  6. Harberger, A. C. (1995), "Monopoly and Resource Allocation", Essential Readings in Economics, Macmillan Education UK, pp. 77–90, doi:10.1007/978-1-349-24002-9_5, ISBN 9780333594520
  7. Newman, Peter, ed. (1998). The New Palgrave Dictionary of Economics and the Law. doi:10.1007/978-1-349-14286-6. ISBN 978-1-349-14288-0.
  8. Newman, Peter, ed. (1998). The New Palgrave Dictionary of Economics and the Law. doi:10.1007/978-1-349-14286-6. ISBN 978-1-349-14288-0.
  9. Thompson, Dennis F. (June 1993). "Mediated Corruption: The Case of the Keating Five". American Political Science Review. 87 (2): 369–381. doi:10.2307/2939047. ISSN 0003-0554. JSTOR 2939047.
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