State monopoly explained

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.

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] 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.[2] [3]

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.[4] 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.[5] This is especially the case if the state monopoly controls access to vital inputs essential to operating within the market.[6]  

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.[3] [7] 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.[8] A state monopoly also retains the ability to reduce service value, or impose restrictive terms and conditions, without experiencing a loss in market share.[9]

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.

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."[10] 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.

Interestingly, a 2013 study found that when private options for products or services are available, welfare is more likely to be maximised.[11] 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.[12] 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.[19] 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.[20]

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.[21] [22] 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).[23] [24]

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.[25] [26] 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.[27]

Despite these reform efforts to promote competitive markets, regulatory and structural reforms struggle to overcome the entrenched market dominance of state monopolies.[28] This is resultant of advantages enjoyed by state monopolies, including first mover advantages.

Advantages

The following advantages, may happen or not:[29]

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.[30]

See also

Notes and References

  1. Book: The Regulation of the State in Competitive Markets in the EU . 2007 . Hart Publishing . 978-1-84113-497-0 . 10.5040/9781472560124.ch-004.
  2. Book: Berg . Sanford V. . Natural Monopoly Regulation . Tschirhart . John . 1989-01-27 . Cambridge University Press . 10.1017/cbo9780511572067 . 978-0-521-33039-8.
  3. 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 . 10.54648/woco2006035 . 248274219 . 1011-4548.
  4. 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 . en . 122 . 506–523 . 10.1016/j.tre.2019.01.002. 159127679 .
  5. Book: Allen, G. C. . Monopoly and Restrictive Practices . 2013-11-05 . Routledge . 978-1-136-51086-1 . 0 . en . 10.4324/9781315016597.
  6. 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 . en . 6 . 4 . 541–555 . 10.1111/j.1467-9779.2004.00179.x . 1097-3923.
  7. Grunichev . A.S. . Mierin . L.A. . Yagudin . R.Kh. . Fakhrutdinov . R.M. . 2015-02-01 . Institutional Features of Interaction of the State and of Natural Monopolies . Mediterranean Journal of Social Sciences . 10.5901/mjss.2015.v6n1s3p73. free .
  8. Peck . James . Rampal . Jeevant . October 2019 . Non-optimality of state by state monopoly pricing with demand uncertainty: An example . Economics Letters . 183 . 108561 . 10.1016/j.econlet.2019.108561 . 200077285 . 0165-1765.
  9. Gordon. (1994). Regulation and economic analysis : a critique over two centuries (1st ed. 1994.). Springer-Science+Business Media, B.V.
  10. Machmud . Aris . September 2022 . Monopoly Analysis of a Limited Liability of State-Owned Enterprises (SOEs) . Jurnal Penegakan Hukum Dan Keadilan . 3 . 2 . 152–168. 10.18196/jphk.v3i2.15825 . 253294152 . free .
  11. Seim . Katja . Waldfogel . Joel . April 2013 . Public Monopoly and Economic Efficiency . American Economic Review . 103 . 2 . 831–862. 10.1257/aer.103.2.831 . 53691574 .
  12. Zhao . Bo . May 2012 . Monopoly, economic efficiency and unemployment . Economic Modelling . en . 29 . 3 . 586–600 . 10.1016/j.econmod.2012.01.001. 154754431 .
  13. Book: W., Sharkey, William . The Theory of Natural Monopoly . 1982 . Cambridge University Press . 978-0-511-57181-7 . 1127513607.
  14. Davis . Colin . Hashimoto . Ken-ichi . February 2016 . Economic Integration, Monopoly Power and Productivity Growth without Scale Effects: Economic Integration and Productivity Growth . Review of Development Economics . en . 20 . 1 . 152–163 . 10.1111/rode.12200. 59503533 .
  15. von Blanckenburg . Korbinian . Neubert . Milena . 2015-04-19 . Monopoly Profit Maximization: Success and Economic Principles . Economics Research International . en . 2015 . 1–10 . 10.1155/2015/875301 . 2090-2123. free .
  16. Toole . Andrew A. . September 2010 . G. G. Djolov, The Economics of Competition: The Race to Monopoly. London: The Haworth Press, 2006, 322 pp., ISBN 0789027895 (SC), $47.50. . Agribusiness . 26 . 1 . 174–175 . 10.1002/agr.20232 . 0742-4477.
  17. 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 . 10.1017/s1053837209090245 . 154765535 . 1053-8372.
  18. February 1949 . Eyring, Carl F. Essentials of physics. New York: Prentice-Hall, Inc. 1948. 422 p. $3.75 . Science Education . 33 . 1 . 85–86 . 10.1002/sce.3730330167 . 1949SciEd..33S..85. . 0036-8326.
  19. 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.
  20. News: David . Gratzer . David Gratzer . The Ugly Truth About Canadian Health Care . Summer 2007. . . 29 December 2008 .
  21. Buehler . Stefan . Gärtner . Dennis . Halbheer . Daniel . July 2006 . Deregulating Network Industries: Dealing with Price-quality Tradeoffs . Journal of Regulatory Economics . en . 30 . 1 . 99–115 . 10.1007/s11149-006-0011-8 . 0922-680X. 10419/76237 . free .
  22. 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 . 10.54648/leie2021020 . 247829825 . 1566-6573.
  23. Estache . A. . 2001-05-01 . Privatization and Regulation of Transport Infrastructure in the 1990s . The World Bank Research Observer . 16 . 1 . 85–107 . 10.1093/wbro/16.1.85. 10986/17127 . free .
  24. Naughton . Barry . January 1992 . Implications of the State Monopoly Over Industry and Its Relaxation . Modern China . en . 18 . 1 . 14–41 . 10.1177/009770049201800102 . 154538716 . 0097-7004.
  25. 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 . en . 25 . 3 . 307–326 . 10.1080/13501763.2016.1249012 . 157115433 . 1350-1763.
  26. Book: Asquer, Alberto . Regulation of Infrastructure and Utilities : Public Policy and Management Issues . 2018 . Palgrave Macmillan . 978-3-319-67735-4 . 1015849922.
  27. Book: 2019-09-24 . Doing Business 2020: Comparing Business Regulation in 190 Economies . 10.1596/978-1-4648-1440-2. 978-1-4648-1440-2 . 243030172 .
  28. Book: 2019-09-24 . Doing Business 2020: Comparing Business Regulation in 190 Economies . 10.1596/978-1-4648-1440-2. 978-1-4648-1440-2 . 243030172 .
  29. Web site: Cabral . Carrie . 2020-07-02 . Are Monopolies Good? Surprisingly, Yes—Peter Thiel Explains . 2023-02-03 . Shortform Books . en-US.
  30. Seim . Katja . Waldfogel . Joel . April 2013 . Public Monopoly and Economic Efficiency . American Economic Review . 103 . 2 . 831–862. 10.1257/aer.103.2.831 . 53691574 .

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "State monopoly".

Except where otherwise indicated, Everything.Explained.Today is © Copyright 2009-2024, A B Cryer, All Rights Reserved. Cookie policy.