Monopolies over a particular commodity, market, or aspect of production are considered good or economically advisable in cases where free-market competition would be economically inefficient, the price to consumers should be regulated, or high risk and high entry costs inhibit initial investment in a necessary sector.
For example, a government may sanction or take partial ownership of a single supplier for a commodity in order to keep costs to consumers to a necessary minimum. Taking such actions is in the public interest if the good in question is relatively inelastic or necessary, that is, without substitutes. This is known as a legal monopoly or, a natural monopoly, where a single corporation can most efficiently carry the supply. Monopolies usually function positively when there is government intervention.
Key Takeaways
- A monopoly exists when one company or player has complete control over one market, product, or means of production.
- Monopolies can hurt consumers because they lead to inefficiencies, lack of innovation, and higher prices.
- Some monopolies, however, can be beneficial to consumers when they would eliminate economic inefficiencies, the prices to consumers can be regulated, or when high risk or high entry costs prevent initial investment in a sector.
- Public utilities are generally considered monopolies that work in the interest of consumers because governments allow for this type of monopoly in order to encourage investment while regulating prices for consumers.
Utilities
Natural monopolies are often found in the market for public utilities; relatively high-cost sectors that deter capital investment. The government may then support the total market share of a single corporation in providing water, electricity, or natural gas to its public. In doing so, both government regulation of the price of a necessary good and a continuous supply is guaranteed, with external competition curtailed by the formation of a monopoly.
Utilities provide essential products to society, including water, electricity, and heat. Keeping these prices low is critical for people to afford such necessities.
Government-Sanctioned Monopolies
Two examples of government-sanctioned monopolies in the United States are the American Telephone and Telegraph Corporation (AT&T) and the United States Postal Service.
Prior to its mandated break up into six subsidiary corporations in 1982, AT&T was the sole supplier of U.S. telecommunications. Since 1970, the United States Postal Service has been the sole courier of standardized mail across the U.S.
Government-sanctioned monopolies need not always be for reasons of economic efficiency or consumer price protection, however. Eighteen states operate legal monopolies of beer, wine, or spirits through government agencies at the wholesale level.
The reason for doing so is to regulate distribution in order to reduce alcohol consumption. These states are Alabama, Idaho, Iowa, Maine, Maryland, Michigan, Mississippi, Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, West Virginia, and Wyoming.
What Is an Example of a Monopoly?
Companies considered to be monopolies include Microsoft, Google, Amazon, De Beers, and Luxottica.
Why Are Monopolies Bad?
Monopolies are considered to be bad because they have no competitors. When a company has no competitors, they can charge whatever price they want, which hurts consumers. Similarly, they may sell poor-quality products since the consumer has no other choice but to buy from the monopoly. Additionally, monopolies lead to a lack of innovation because there is no need to improve their product to entice consumers.
How Can Monopolies Be Stopped?
Monopolies are usually stopped by governments, particularly when governments pass antitrust laws and regulations. Similarly, governments can call for some monopolies to be broken up if they believe the monopoly to be harming consumers. In addition, governments can prevent mergers and acquisitions from going through to stop a monopoly from being created.
The Bottom Line
Monopolies are generally considered bad because they have complete control over one market, which is never in the best interest of the consumer. It is not in the best interest of the consumer because a monopoly has no competition, so it can charge whatever price it wants, knowing that consumers have no other option if the price is too high.
Similarly, monopolies can result in goods or services with poor quality because there is no incentive to improve the goods for consumers since, again, they have no other option. This also leads to a lack of innovation in the market.
However, there are times when monopolies can be good, such as when barriers of entry are too high, when inefficiency can be eliminated, or when prices can be regulated. Typically, monopolies in conjunction with the government can be beneficial to consumers.
