Is Monopoly a Justification for Government Regulation?

Welfare economics of monopoly and rent seeking

Monopolisation has resulted in a higher price being paid (Pm not Pc) and the quantity bought (Qm not Qc) has been reduced. Part of the consumer surplus triangle has been shifted to producers as excess profits but part of it is totally lost to society as shown by the reduction in output from Qc to Qm.

The monopolised industry may result in more efficient production techniques and lowered costs. The net welfare gain or loss to the total economy is the difference between the red and blue areas.

Tullock’s (1967) argument is that if a successful monopolist can extort the excess profits from his customers such as through a government licence giving them a monopoly, such a large prize is worth the investment of up to an equivalent amount of resources  equal to the capitalised value of the future monopoly profits.

Rational entrepreneurs should be willing to invest resources in attempts to form a monopoly until the marginal cost equals the properly discounted marginal return. Under certain assumptions (see Posner 1975) the competitive outlays to establish a monopoly will exactly equal the present value of the profit rectangle.

Rent_seeking - Rent_seeking Picture Slideshow

The Tullock rectangle may have to be added to the Harberger triangle when calculating the potential loss of welfare associated with monopoly.

Economic Theory and the Meaning of Competition

As it is, it is one of the great paradoxes of economic science that every act of competition on the part of a businessman is evidence, in economic theory, of some degree of monopoly power, while the concepts of monopoly and perfect competition have this important common feature: both are situations in which the possibility of any competitive behaviour has been ruled out by definition

Paul J McNulty, Economic Theory and the Meaning of Competition

HT: spontaneousorder.blogspot

Good monopolies and bad price cuts

A surprising number of well-meaning people want to protect consumers from the scourge of lower prices. These abominations come from imports, new entry or cost reductions.

Richard Epstein talked about how progressives think they can tell the difference between a good monopoly and a bad monopoly.

MON_PROF.gif

There is one instance in which monopoly could arise in the free market – exclusive ownership of an essential input (Kirzner 1973):

Monopoly … in a market free of government obstacles to entry, means for us the position of a producer whose exclusive control over necessary inputs blocks competitive entry into the production of his product.

Monopoly thus does not refer to the position of a producer who, without any control over resources, happens to be the only producer of a particular product. This producer is fully subject to the competitive market process, since other entrepreneurs are entirely free to compete with him.

In all other cases, monopoly is the grant by government of an exclusive privilege to produce or sell a product (Rothbard 1962). This definition is from the common law as per Lord Coke:

A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise . . . to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or cor­porate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.

Ronald Coase and the preoccupation with monopoly

Ronald Coase

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

After this foray written in 1971, Coase went further in an appreciation written for George Stigler’s Nobel Prize in 1982:

…for reasons which are not altogether clear to me, it is a field [of industrial organisation] which has come to concentrate on The Monopoly Problem and, more specifically in the United States, on the problems thrown up by the administration of the antitrust laws.

The result has not been a happy one for economics.

By concentrating on the problem of monopoly in dealing with an economic system which is, broadly speaking, competitive, economists have had their attention misdirected and as a consequence they have left unexplained many of the salient features of our economic system or have been content with very defective explanations.

Uneasy Money

Commentary on monetary policy in the spirit of R. G. Hawtrey

The Market Monetarist

Markets Matter, Money Matters...

The Inquiring Mind

“Those who expect to reap the blessings of freedom, must, like men, undergo the fatigues of supporting it.” Thomas Paine - "Limitation is essential to authority. A government is legitimate only if it is effectively limited." ~ Lord Acton - Commentary on what interests me, reflecting my personal take on the world

Point of Order

Politics and the economy

New Historical Express

(Formerly Hatful of History)

Economics in the Rear-View Mirror

Archival Artifacts from the History of Economics

Truth on the Market

Scholarly commentary on law, economics, and more

Stockerblog

Philosophy, Politics, Culture from Barry Stocker, British philosopher based in Istanbul

Organizations and Markets

Economics of organizations, strategy, entrepreneurship, innovation, and more

John Quiggin

Commentary on Australian and world events from a socialist and democratic viewpoint

The Antiplanner

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Pedestrian Observations

For Walkability and Good Transit, and Against Boondoggles and Pollution

Bet On It

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Trade Diversion

Commentary on development, globalization, and trade by Jonathan Dingel.

Movie Nation

Roger Moore's film criticism, against the grain since 1984.

Conversable Economist

In Hume’s spirit, I will attempt to serve as an ambassador from my world of economics, and help in “finding topics of conversation fit for the entertainment of rational creatures.”

AwayPoint

Between An Island of Certainties and the Unknown Shore

Weapons and Warfare

History and Hardware of Warfare

fportier.wordpress.com/

Franck Portier's professional page

NZCPR Site

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Anti-Dismal

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Bowalley Road

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

History of Sorts

WORLD WAR 2,EIGHTIES,MUSIC,HISTORY,HOLOCAUST

Tudor Chronicles

News, reviews and talk all about the Tudors

Karl du Fresne

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Roger Pielke Jr.

an undisciplined academic - @RogerPielkeJr on Twitter

Great Books Guy

Reading The Classics

@STILLTish. Gender Abolition

Examining Gender Identity ideology and its impact on Women's Sex based rights and Gay Rights. Exploring how this has taken such firm root in Western societies (Cognitive & Regulatory Capture).

200-Proof Liberals

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

What Paul Gregory is Writing About

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Offsetting Behaviour

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

JONATHAN TURLEY

Res ipsa loquitur - The thing itself speaks

Conversable Economist

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Barrie Saunders

Thoughts on public policy and the media

The Victorian Commons

Researching the House of Commons, 1832-1868

Coyote Blog

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

The History of Parliament

Blogging on parliament, politics and people, from the History of Parliament

Books & Boots

reflections on books and art

Legal History Miscellany

Posts on the History of Law, Crime, and Justice

Sex, Drugs and Economics

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Climatism

Tracking Anthropogenic Climate Alarmism

%d bloggers like this: