The Good, the Bad, and the Ugly

Monopoly is not always a bad thing. Then again, it is not always a good thing. There are even times where monopoly is downright ugly, unless, of course, you are the proud parent of a monopoly. When monopoly is allowed to exist, it is for a good reason. Yet, even though the reason is good, monopolies can have some negative effects. History has shown that left unchecked, monopolies can harm an economy.

The Good

Good monopolies come in several forms. The first is natural monopoly. When the average cost of production falls as a factory grows larger, then economies of scale are present. Natural monopoly exists when economies of scale encourage production by a single producer. A commonly cited example of natural monopoly is your local electrical utility. A feature of power plants that encourages natural monopoly is that as the size of a power plant increases, the cost per kilowatt hour of electricity falls. You might own a small electrical generator. Imagine the cost of operating the generator or multiple small generators just to meet your home's electrical needs. Now imagine the cost of every household in a city running on multiple portable generators. The total fixed cost of generators for the community would be quite high and the variable cost of running gas or diesel generators would be astronomical. Compare that situation with the one that most likely exists in your city. Instead of multitudes of portable generators, a few large coal-fired power plants are able to generate electricity for the entire city at a much lower total cost. Remember that utilities are monopolies. What keeps the utility from charging a monopoly price for electricity? Government regulates the prices that utilities are able to charge their customers for electricity. By controlling prices, government encourages low-cost production while allowing the utility to experience an accounting profit on production.

Besides patents, United States law also grants copyrights and trademarks to protect intellectual property. Copyrights protect written and other creative work and remain in force for seventy years from the original writing. Trademarks protect company and product names and can last indefinitely.

The technological monopoly is another form of monopoly that is encouraged. When a firm invents a new product or process and receives patent protection, the firm becomes a technological monopolist for that particular product. According to the United States Patent and Trademark Office, patent protection lasts for twenty years from the date on which it was originally applied. During that period of time, no other firm may develop or import the technology. The patent holder may develop or sell the rights to develop the technology to a firm that can legally operate as a monopolist.

During the period of patent protection, the patent holder as a monopolist can charge a monopoly price and earn economic profits. If monopoly prices are higher than competitive prices, why is this encouraged? Patent protection encourages innovation, invention, and research and development. Without the protection, firms would have little incentive to invest billions of dollars in research knowing the firm next door could just copy the product without having made the investment and profit nonetheless. It is because of patent protection and the ability to earn monopoly profits that American and European pharmaceutical companies develop so many lifesaving medications. Without patent protection, there would be little incentive for the pharmaceutical industry to pursue its research.

The Bad?

At times government may decide to step into the marketplace in order to provide a good or service. An example of government monopoly is the United States Postal Service. What about UPS and FedEx? Only the United States Postal Service is allowed to deliver a “letter” written on paper and delivered in a paper envelope. UPS and FedEx are in the package delivery business, even if that package is a letter written on paper and delivered in a flat paper-cardboard envelope.

Other examples of government monopoly include the various departments and agencies of the executive branch. Much of what they do and provide could be done by the private sector of the economy, but for many reasons the government has deemed them to be government functions.

The arguments for and against government monopolies fall mainly on philosophical grounds. Many conservatives and libertarians are opposed to government performing the functions of private enterprise on the grounds that government is wasteful and inefficient. Those with more populist viewpoints tend to see a need for government performing some of the functions of private enterprise on the grounds that government is less wasteful and more efficient. You decide.

The Ugly

Pure, unregulated monopoly is ugly. A firm that is the sole provider of a good or service is able to prevent competition. It can charge whatever price the consumer will pay. This is the monopoly that is most harmful to society. Although one may say “to the victor go the spoils,” once-competitive firms that become monopolists need to be checked by regulation or broken up into competing firms. Competition benefits society by providing a variety of goods and services at competitive prices that accurately reflect the costs of production. Pure monopoly is the opposite of this condition. Pure monopoly is one good at a price that in no way reflects the true cost of production. The diamond monopoly of De Beers is the classic example of monopoly gone bad. De Beers at the height of its power dictated the diamond industry. By controlling the resource and coercing the wholesalers and cutters to abide by its demands, De Beers created an illusion of scarcity and value in the diamond market that allowed it to earn economic profits for over 100 years. Now, before you sell your diamonds in disgust, you should remember that you were not coerced to buy the diamond. You bought the diamond because the benefit outweighed the cost. The problem for the buyer is that you never realized how much of the cost was De Beers' profit.

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