State monopoly

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In economics, a government monopoly or public monopoly is a form of coercive monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law. It is a monopoly created, owned, and operated by the government. It is usually distinguished from a government-granted monopoly, where the government grants a monopoly to a private individual or company.

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A government monopoly may be run by any level of government—national, regional, local; for levels below the national, it is a local monopoly. The term state monopoly usually means a government monopoly run by the national government.

Characteristics of state monopolies

A state monopoly can be characterized by its commercial behavior not being effectively limited by the competitive pressures of private organisations. [1] [2] This occurs when its business activities exert an extensive influence within the market, can act autonomously of any competitors, and potential competitors are unable to successfully compete with it. [3] [4]

These activities have a major influence on the operational environment, when its trading activities are not subject to competitive forces inherent within free trading markets. [5] Therefore, this results in using its market dominance and influence to its advantage, in affecting how the market evolves over a long period of time. [6] This is especially the case if the state monopoly controls access to vital inputs essential to operating within the market. [7]  

The high degree of autonomy and ability to act independently in the market, has been demonstrated by the ability to alter relationships with its customers to its advantage, without negatively impacting its dominant market share. [4] [8] A state monopoly's ability to increase the price or quantity of goods and services provided, without a relational change in its own operating costs (coupled with maintaining this price or quantity at above a market clearing rate), demonstrates its ability to disregard any competitive forces within the market. [9] A state monopoly also retains the ability to reduce service value, or impose restrictive terms and conditions, without experiencing a loss in market share. [10]

Purpose of State Monopolies

The theoretical purpose of state monopolies is to maximise collective welfare. This is based on the idea that public administrations are not strictly aimed at profit-making. Products or services therefore can be guaranteed to consumers of that supply of that product or service under the best conditions and at prices that are comparable to the expectations of the value and characteristics of the product or service. [11]

However, the structure of a country's economy more broadly usually determines how state monopolies operate. In countries that are members of the OECD, sectors where there are state monopolies are usually those that are meeting the "needs of utilities and public services." [12] Whereas, in developing economies, state monopolies can disrupt healthy business competition, and in centrally controlled economies, such stifling of private competition plateaus economic growth.

The concept of public goods, as produced and distributed under state monopolies, are that they are supplied at a level independent from, or inconsistent with, the actual market demand for the good. Therefore, the price does not reflect the utility of the product or service. Under Marxist economic ideology, this advocates for a centralised production system to account for the fact this product or service should be universally available and competition 'badly adapts,' to the constraints to which the supply of these products or services are subject. [11]

Interestingly, a 2013 study found that when private options for products or services are available, welfare is more likely to be maximised. [13] The simple rationalisation to this is that when there are more players, there is therefore more choice. More choice allows greater access to a greater number of people.

Market power

A state monopoly's market power and dominance can arise from its superior innovative capacity or greater performance. [14] However, any of the three following factors more broadly explain a state monopoly's existence:

Evidence of exercising market power

The primary determinations of demonstrating the market power of state monopolies are:

Examples

The most prominent example of the monopoly is law and the legitimate use of physical force. [21] In many countries, the postal system is run by the government with competition forbidden by law in some or all services. Also, government monopolies on public utilities, telecommunications and railroads have historically been common, though recent decades have seen a strong privatization trend throughout the industrialized world.

In Nordic countries, some goods deemed harmful are distributed through a government monopoly. For example, in Finland, Iceland, Norway, Sweden, and the Faroe Islands government-owned companies have monopolies for selling alcoholic beverages. Casinos and other institutions for gambling might also be monopolized. In Finland, the government has a monopoly to operate slot machines (see Veikkaus). Similar regimes for alcohol exist in the United States, where certain alcoholic beverage control states (ABC states), e.g. Pennsylvania and Virginia, maintain state-owned-and-operated monopolies on the sale of certain kinds of alcohol (typically distilled spirits and sometimes wine or beer). In these monopolies over harmful goods or services, the monopoly is designed to reduce consumption of the product by deliberately decreasing the efficiency of the market.

Governments often create or allow monopolies to exist and grant them patents. This limits entry and allow the patent-holding firm to earn a monopoly profit from an invention.

Health care systems where the government controls the industry and specifically prohibits competition, such as in Canada, are government monopolies. [22]

Reforms to enhance competition

Although state monopolies are sustained through legislative instruments, many major economies have seen efforts to reform the disproportionate market powers they sustain, to therefore enhance competition. [23] [24] This has been enacted through regulatory reforms (removing statutory restrictions to market competition) and structural reforms (including separating contestable elements of a state monopoly, and creating third party rights of access to natural monopolies). [25] [26]

Across all levels of governmental jurisdiction, both structural and regulatory reforms have been preferred, as it forces all market participants (both state monopolies and private industry) to respond to competitive pressures, as opposed to legislated regulatory structures. [27] [28] This has been observed to result in more optimal outcomes for an economy, as resource allocation is no longer directed by legislative instruments or regulatory authorities. [29]

Despite these reform efforts to promote competitive markets, regulatory and structural reforms struggle to overcome the entrenched market dominance of state monopolies. [30] This is resultant of advantages enjoyed by state monopolies, including first mover advantages. [23]

Advantages

The following advantages, may happen or not: [31]

Disadvantages

Government monopolies have traditional risks of usual monopolies:

Furthermore, there are concerns that government-controlled entitles can be manipulated by political will. This can manifest through the allocation of resources for the purpose of political ends, rather than for the promotion of economic efficiency. [32]

See also

Related Research Articles

In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any other external authority. Proponents of the free market as a normative ideal contrast it with a regulated market, in which a government intervenes in supply and demand by means of various methods such as taxes or regulations. In an idealized free market economy, prices for goods and services are set solely by the bids and offers of the participants.

<span class="mw-page-title-main">Microeconomics</span> Behavior of individuals and firms

Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the national economy as a whole, which is studied in macroeconomics.

A monopoly, as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterised by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with unfair price raises. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

<span class="mw-page-title-main">Market economy</span> Type of economic system

A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.

<span class="mw-page-title-main">Market failure</span> Concept in public goods economics

In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.

<span class="mw-page-title-main">Public utility</span> Entity which operates public service infrastructure

A public utility company is an organization that maintains the infrastructure for a public service. Public utilities are subject to forms of public control and regulation ranging from local community-based groups to statewide government monopolies.

Rent-seeking is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic efficiency through misallocation of resources, stifled competition, reduced wealth creation, lost government revenue, heightened income inequality, risk of growing corruption and cronyism, decreased public trust in institutions and potential national decline.

Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.

In economics and business ethics, a coercive monopoly is a firm that is able to raise prices and make production decisions without the risk that competition will arise to draw away their customers. A coercive monopoly is not merely a sole supplier of a particular kind of good or service, but it is a monopoly where there is no opportunity to compete with it through means such as price competition, technological or product innovation, or marketing; entry into the field is closed. As a coercive monopoly is securely shielded from the possibility of competition, it is able to make pricing and production decisions with the assurance that no competition will arise. It is a case of a non-contestable market. A coercive monopoly has very few incentives to keep prices low and may deliberately price gouge consumers by curtailing production.

<span class="mw-page-title-main">State ownership</span> Ownership of industry, assets, or businesses by a public body

State ownership, also called public ownership or government ownership, is the ownership of an industry, asset, property, or enterprise by the national government of a country or state, or a public body representing a community, as opposed to an individual or private party. Public ownership specifically refers to industries selling goods and services to consumers and differs from public goods and government services financed out of a government's general budget. Public ownership can take place at the national, regional, local, or municipal levels of government; or can refer to non-governmental public ownership vested in autonomous public enterprises. Public ownership is one of the three major forms of property ownership, differentiated from private, collective/cooperative, and common ownership.

Allocative efficiency is a state of the economy in which production is aligned with the preferences of consumers and producers; in particular, the set of outputs is chosen so as to maximize the social welfare of society. This is achieved if every produced good or service has a marginal benefit equal to the marginal cost of production.

Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust law, anti-monopoly law, and trade practices law; the act of pushing for antitrust measures or attacking monopolistic companies is commonly known as trust busting.

In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing revenue. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit maximising level of output. The size of the gap, which encapsulates the firm's level of market dominance, is determined by the residual demand curve's form. A steeper reverse demand indicates higher earnings and more dominance in the market. Such propensities contradict perfectly competitive markets, where market participants have no market power, P = MC and firms earn zero economic profit. Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are referred to as 'price makers' or 'price setters'.

Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the benefits provided. It can be viewed in contrast to a market failure, which is an economic inefficiency that results from the free market itself, and can potentially be corrected through government regulation. However, Government failure often arises from an attempt to solve market failure. The idea of government failure is associated with the policy argument that, even if particular markets may not meet the standard conditions of perfect competition required to ensure social optimality, government intervention may make matters worse rather than better.

<span class="mw-page-title-main">Market structure</span> Differentiation of firms by goods and operations

Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it easier to understand the characteristics of diverse markets.

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In economics, market concentration is a function of the number of firms and their respective shares of the total production in a market. Market concentration is the portion of a given market's market share that is held by a small number of businesses. To ascertain whether an industry is competitive or not, it is employed in antitrust law and economic regulation. When market concentration is high, it indicates that a few firms dominate the market and oligopoly or monopolistic competition is likely to exist. In most cases, high market concentration produces undesirable consequences such as reduced competition and higher prices.

<span class="mw-page-title-main">Competition (economics)</span> Economic scenario

In economics, competition is a scenario where different economic firms are in contention to obtain goods that are limited by varying the elements of the marketing mix: price, product, promotion and place. In classical economic thought, competition causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. The greater the selection of a good is in the market, the lower prices for the products typically are, compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).

Economic law is a set of legal rules for regulating economic activity. Economics can be defined as "a social science concerned with the production, distribution, and consumption of goods and services." The regulation of such phenomena, law, can be defined as "customs, practices, and rules of conduct of a community that are recognized as binding by the community", where "enforcement of the body of rules is through a controlling authority." Accordingly, different states have their own legal infrastructure and produce different provisions of goods and services.

<span class="mw-page-title-main">Hoarding (economics)</span> Economic concept

Hoarding in economics refers to the concept of purchasing and storing a large amount of product belonging to a particular market, creating scarcity of that product, and ultimately driving the price of that product up. Commonly hoarded products include assets such as money, gold and public securities, as well as vital goods such as fuel and medicine. Consumers are primarily hoarding resources so that they can maintain their current consumption rate in the event of a shortage. Hoarding resources can prevent or slow products or commodities from traveling through the economy. Subsequently, this may cause the product or commodity to become scarce, causing the value of the resource to rise.

References

  1. ↑ The Regulation of the State in Competitive Markets in the EU. Hart Publishing. 2007. doi:10.5040/9781472560124.ch-004. ISBN   978-1-84113-497-0.
  2. ↑ Gordon, Richard L. (1994), "Problems of Environmental Impacts and Regulating Business Practices", Regulation and Economic Analysis, Boston, MA: Springer US, pp. 129–147, doi:10.1007/978-1-4615-2620-9_10, ISBN   978-1-4613-6123-7 , retrieved 2022-05-02
  3. ↑ Berg, Sanford V.; Tschirhart, John (1989-01-27). Natural Monopoly Regulation. Cambridge University Press. doi:10.1017/cbo9780511572067. ISBN   978-0-521-33039-8.
  4. 1 2 Weber Waller, Spencer (2006-09-01). "Book Review: Economics of Regulation and Antitrust, W. Kip Viscusi, Joseph E. Harrington, Jr., and John M. Vernon (MIT Press, Cambridge, Massachusetts & London, England, 4th Edn, 2005)". World Competition. 29 (3): 504. doi:10.54648/woco2006035. ISSN   1011-4548. S2CID   248274219.
  5. ↑ Li, Shuai; Cai, Jiannan; Feng, Zhuo; Xu, Yifang; Cai, Hubo (February 2019). "Government contracting with monopoly in infrastructure provision: Regulation or deregulation?". Transportation Research Part E: Logistics and Transportation Review. 122: 506–523. doi:10.1016/j.tre.2019.01.002. S2CID   159127679.
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  7. ↑ Sibley, David S.; Doane, Michael J.; Williams, Michael A.; Tsai, Shu-Yi (October 2004). "Pricing Access to a Monopoly Input". Journal of Public Economic Theory. 6 (4): 541–555. doi:10.1111/j.1467-9779.2004.00179.x. ISSN   1097-3923.
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  9. ↑ Peck, James; Rampal, Jeevant (October 2019). "Non-optimality of state by state monopoly pricing with demand uncertainty: An example". Economics Letters. 183: 108561. doi:10.1016/j.econlet.2019.108561. ISSN   0165-1765. S2CID   200077285.
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  12. ↑ Machmud, Aris (September 2022). "Monopoly Analysis of a Limited Liability of State-Owned Enterprises (SOEs)". Jurnal Penegakan Hukum Dan Keadilan. 3 (2): 152–168. doi: 10.18196/jphk.v3i2.15825 . S2CID   253294152.
  13. ↑ Seim, Katja; Waldfogel, Joel (April 2013). "Public Monopoly and Economic Efficiency". American Economic Review. 103 (2): 831–862. doi:10.1257/aer.103.2.831. S2CID   53691574.
  14. ↑ Zhao, Bo (May 2012). "Monopoly, economic efficiency and unemployment". Economic Modelling. 29 (3): 586–600. doi:10.1016/j.econmod.2012.01.001. S2CID   154754431.
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  19. 1 2 Brown, John Howard (June 2009). "Henry W. de Jong and William G. Shepherd, eds., Pioneers of Industrial Organization: How the Economics of Competition and Monopoly Took Shape (Cheltenham, UK: Edward Elgar, 2007)". Journal of the History of Economic Thought. 31 (2): 243–244. doi:10.1017/s1053837209090245. ISSN   1053-8372. S2CID   154765535.
  20. 1 2 "Eyring, Carl F. Essentials of physics. New York: Prentice-Hall, Inc. 1948. 422 p. $3.75". Science Education. 33 (1): 85–86. February 1949. Bibcode:1949SciEd..33S..85.. doi:10.1002/sce.3730330167. ISSN   0036-8326.
  21. ↑ K. Grechenig, M. Kolmar, The State's Enforcement Monopoly and the Private Protection of Property, Journal of Institutional and Theoretical Economics (JITE) 2014, vol. 170 (1), 5-23.
  22. ↑ Gratzer, David (Summer 2007). "The Ugly Truth About Canadian Health Care". City Journal . Manhattan Institute . Retrieved 29 December 2008.
  23. 1 2 Buehler, Stefan; Gärtner, Dennis; Halbheer, Daniel (July 2006). "Deregulating Network Industries: Dealing with Price-quality Tradeoffs". Journal of Regulatory Economics. 30 (1): 99–115. doi:10.1007/s11149-006-0011-8. hdl: 10419/76237 . ISSN   0922-680X.
  24. ↑ Butler, Graham (2021-09-01). "State Monopolies and the Free Movement of Goods in EU Law: Getting Beyond Obscure Clarity". Legal Issues of Economic Integration. 48 (3): 285–308. doi:10.54648/leie2021020. ISSN   1566-6573. S2CID   247829825.
  25. ↑ Estache, A. (2001-05-01). "Privatization and Regulation of Transport Infrastructure in the 1990s". The World Bank Research Observer. 16 (1): 85–107. doi:10.1093/wbro/16.1.85. hdl: 10986/17127 .
  26. ↑ Naughton, Barry (January 1992). "Implications of the State Monopoly Over Industry and Its Relaxation". Modern China. 18 (1): 14–41. doi:10.1177/009770049201800102. ISSN   0097-7004. S2CID   154538716.
  27. ↑ Haber, Hanan (2018-03-04). "Liberalizing markets, liberalizing welfare? Economic reform and social regulation in the EU's electricity regime". Journal of European Public Policy. 25 (3): 307–326. doi:10.1080/13501763.2016.1249012. ISSN   1350-1763. S2CID   157115433.
  28. ↑ Asquer, Alberto (2018). Regulation of Infrastructure and Utilities : Public Policy and Management Issues. Palgrave Macmillan. ISBN   978-3-319-67735-4. OCLC   1015849922.
  29. ↑ Doing Business 2020: Comparing Business Regulation in 190 Economies. 2019-09-24. doi:10.1596/978-1-4648-1440-2. ISBN   978-1-4648-1440-2. S2CID   243030172.
  30. ↑ Doing Business 2020: Comparing Business Regulation in 190 Economies. 2019-09-24. doi:10.1596/978-1-4648-1440-2. ISBN   978-1-4648-1440-2. S2CID   243030172.
  31. ↑ Cabral, Carrie (2020-07-02). "Are Monopolies Good? Surprisingly, Yes—Peter Thiel Explains". Shortform Books. Retrieved 2023-02-03.
  32. ↑ Seim, Katja; Waldfogel, Joel (April 2013). "Public Monopoly and Economic Efficiency". American Economic Review. 103 (2): 831–862. doi:10.1257/aer.103.2.831. S2CID   53691574.
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