Government – Created Monopolies

From economics stand point, government-created monopoly is a firm or individual given the exclusive right by the government to produce or supply a particular good or service (Wolfstetter, 2008). Government-created monopoly enjoys an industry without competition, sets arbitrary production policies, charges high prices and benefits from independent market, protected from the law of supply and demand. The government can create monopoly with the sole purpose of furthering public good. It can exclude potential competitors by enacting laws, regulations and other enforcements.

Gone are the days that government intervention in the market is highly criticized. The government can award the right to sell to a single individual or firm through intellectual property laws (Sherman, 1989). These laws grant right to people who have done creative work, new inventions and tradenames in the form of copyrights, patents and trademarks. For example, a pharmaceutical company discovers a drug to cure Aids. The company can apply for a patent and if granted by the government, can sell this drug for a set number of years.

The intellectual property laws are often criticized for going against the principle behind government-created monopolies. It is argued that instead of promoting public control over the accessibility and quality of essential goods and services, monopolies created by intellectual property laws intend to reap profits over the use of their work. This is the reason why government-created monopolies are accompanied by extensive regulations to prevent the artists and investors from taking too much profit but still allow them to have great incentives to continue in their creative work.

In the United States, government-created monopolies include cable television and water providers (Knauth, 2009). In other countries, they may include public roads, mail, electric power as well as highly specialized and regulated fields such as education and gambling. The principle of laissez faire was long discredited by the government through special franchises, licenses, subsidies, by legislative actions which granted special privileges to a firm or a group and prohibit others from entering a particular field.

This was accounted by Ayn Rand in her “Notes on the History of American Free Enterprise” where she writes: “The Central Pacific—which was built by the ‘Big Four’ of California, on federal subsides—was the railroad which was guilty of all the evils popularly held against railroads. For almost thirty years, the Central Pacific controlled California, held a monopoly and permitted no competitor to enter the state. It charged disastrous rates, changed them every year, and took the entire profit of any California farmer or shipper who had no other railroad to turn to.

How was this made possible? It was done through the power of the California legislature. The Big Four controlled the legislature and held the state closed to competitors by legal restrictions—such as, for instance, a legislative act which gave the Big Four exclusive control of the entire coast line of California and forbade any other railroad to enter any port. During these thirty years, many attempts were made by private interests to start competing railroads in California and break the monopoly of the Central Pacific.

These attempts were defeated—not by methods of free trade and free competition, but by legislative action. ” As a consumer, indeed government-created monopolies have repercussions to consumers (Boldrin & Levine, 2008). Unlike if a monopoly is in a particular industry where consumers can benefit from predatory pricing, government-created monopolies are protected by law to charge a high price for their products or services. They do not fear competition so they can set pricing and production policies without consulting the market.

This causes inefficiencies such as unnecessary high price charge to consumers. For instance, copyright drives up the cost of a work from its marginal cost of production to a much higher price. With consumers’ budget line remaining the same, this inevitably reduces the aggregate utility. It can lead to severe price discrimination. A poor American citizen can be charged a higher price for the same book a rich guy living in another country is able to buy for a lower price.

Moreover, government protection can be argued to reduce creative outputs of artists or inventions by investors for it can also serve as a strong deterrent to freedom of artistic expression. Creative works and inventions take longer to reach the public because copyright now tends to last longer and the expansion to public domain is undermined. It distorted incentives because too many financial and human investments are concentrated in one area that other areas become underprovided.

The rationale behind government-created monopolies is to give incentive to those people who work hard and invest in their craft and invention. Intellectual property rights given to them allow them to be the sole provider of the product or service in the market. Due to this privilege, however, artists and investors are able to charge unreasonable price to consumers. With these considerations, the government should provide regulations to meet the balance between giving the appropriate incentive to the monopolist and enough protection to consumers. Works Cited Boldrin, Michele & David Levine.

“Against Intellectual Property Rights. ” Cambridge: Cambridge University Press, 2008. Knauth, Oswald Whitman. “The Policy of the United States Towards Industrial Monopoly. ” NY: BiblioLife Reproduction Series, 2009. Rand, Ayn. “Notes on the History of American Free Enterprise. ” Capitalism: The Unknown Idea (1967): 108-117. Sherman, Roger. “The Regulation of Monopoly. ” Cambridge: Cambridge University Press, 1989. Wolfstetter, Elmar. “Topics in Microeconomics: Industrial Organization, Auctions, and Incentives. ” Cambridge: Cambridge University Press, 2008.