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.
The Tullock rectangle may have to be added to the Harberger triangle when calculating the potential loss of welfare associated with monopoly.
Gordon Tullock used Sweden to support his argument that the basic problem with The Road to Serfdom was:
“that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden did not lead to any loss of non-economic freedoms.”
Hayek discusses the Road to Serfdom
When looking back longingly at the mixed economies of 1950s and 1960s, people often forget who won elections much of the time back then.
The period that managed to combine a large degree of state ownership and control of the UK economy with a free and diverse media and political pluralism was often under Tory rule (1951 to 1964) with the Labor governments (1964-1970) often with a margin of a few seats.
Then there was the Menzies era in Australia with Liberal party rule from 1949 to 1972; and then 1975 to 1983. Much the same in New Zealand. The Left rarely held power in the mid-20th century.
The Christian democrats usually ran both Italy and Germany in coalitions, as I recall, up until the late 1960 or the early 1970s. Gaullist France? The LDP in Japan?
That is where Hayek got it wrong. The left-wing parties were not the face of the future.
Power rotated in Schumpeterian sense. Governments were voted out when they disappointed voters with the replacement not necessarily having very different policies.
The right-wing parties won many western European elections by that well-proven old trick of being slightly to the right of the left-wing parties. Hayek failed to predict this.
“We can build up beautiful theories which would explain everything, if we could fit into the blanks of the formulae the specific information; but we never have all the specific information.
Therefore, all we can explain is what I like to call “pattern prediction.”
You can predict what sort of pattern will form itself, but the specific manifestation of it depends on the number of specific data, which you can never completely ascertain. Therefore, in that intermediate field — intermediate between the fields where you can ascertain all the data and the fields where you can substitute probabilities for the data–you are very limited in your predictive capacities.”
“Our capacity of prediction in a scientific sense is very seriously limited. We must put up with this.
We can only understand the principle on which things operate, but these explanations of the principle, as I sometimes call them, do not enable us to make specific predictions on what will happen tomorrow.”
Hayek’s warnings in The Road to Serfdom was against a background where democracy was still young and insecure in Europe and peacetime democratic governments were, up until then, not much bigger than a post office and a military. The big governments of his day were not democratic.
As Popper and Kuhn understood it, bold, risky hypotheses are at the heart of great advances in the sciences and scholarship generally.
Why Evolution is True is a blog written by Jerry Coyne, centered on evolution and biology but also dealing with diverse topics like politics, culture, and cats.
“We do not believe any group of men adequate enough or wise enough to operate without scrutiny or without criticism. We know that the only way to avoid error is to detect it, that the only way to detect it is to be free to inquire. We know that in secrecy error undetected will flourish and subvert”. - J Robert Oppenheimer.
Utopia, you are standing in it! 
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