Government control of an industry or economic sector
Ineconomics, a government monopoly orpublic monopoly is a form ofcoercive monopoly in which agovernment agency orgovernment 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 agovernment-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 alocal monopoly. The term 'state monopoly' usually means a government monopoly run by the national government.
A state monopoly can be characterized by its commercial behavior not being effectively limited by the competitive pressures ofprivate organisations.[1][2] This occurs when its business activities exert an extensive influence within themarket, can act autonomously of anycompetitors, and potential competitors are unable to successfully compete with it.[3][4]
These activities have a major influence on the operational environment when their trading activities are not subject to competitive forces inherent withinfree trading markets.[5] Therefore, this results in using itsmarket dominance and influence to its advantage, in affecting how the market evolves over a long period of time.[6] This is especially the case if the state monopoly controls access to vital inputs essential to operating within the market.[7]
The high degree of autonomy and ability to act independently in the market has been demonstrated by the ability to alter relationships with itscustomers to its advantage, without negatively impacting its dominant market share.[4][8] A state monopoly's ability to increase theprice or quantity ofgoods and services provided, without a relational change in its ownoperating costs (coupled with maintaining this price or quantity at above amarket clearing rate), demonstrates its ability to disregard any competitive forces within the market.[9] A state monopoly also retains the ability to reduce service value, or impose restrictiveterms and conditions, without experiencing a loss inmarket share.[10]
The theoretical purpose of state monopolies is to maximize collectivewelfare. 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.[11]
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."[12] Whereas, indeveloping economies, state monopolies can disrupt healthy business competition, and incentrally controlled economies, such stifling of private competition plateaus economic growth.
The concept of public goods, as produced and distributed under state monopolies, is 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. UnderMarxist economic ideology, this advocates for a centralized production system to account for the fact that this product or service should be universally available, and competition 'badly adapts' to the constraints to which the supply of these products or services is subject.[11]
Interestingly, a 2013 study found that when private options for products or services are available, welfare is more likely to be mamaximized[13] 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.
A state monopoly's market power and dominance can arise from its superiorinnovative capacity or greater performance.[14] However, any of the three following factors more broadly explain a state monopoly's existence:
A natural monopoly endures within the market, whereby the most efficient form of meeting demand is through the creation of asingle government entity.[15]
The state monopoly is legislated for, with legislative instruments precluding competitive activities regarding the provision of goods or services.[15]
A poorly contestable market exists, with competition previously operating inefficiently despite the lack of legal restrictions.[15][16]
The primary determinations of demonstrating the market power of state monopolies are:
The monopoly'seconomic income within the market is characterized by disproportionate returns on its existingasset base.[17] This income would be excessive, if it were not a result of its inefficient operations.[17][18]
There is a substantial difference between best practice benchmarks within private organizations and the state monopoly's own productive efficiency.[19] For example, a monopoly's lack of productive efficiency could be a result ofgold plating of assets.[20]
The monopolycross-subsidies incomes between loss-making activities and profitable activities.[19] If the aforementioned occurs through production or pricing behaviors, this suggests usual competitive forces characteristic of competitive markets are not being applied to the state monopoly.[18] A firm engaging in this practice under normal market conditions, would not survive in thelong run.[20][18]
The most prominent example of the monopoly is law and the legitimate use of physical force.[21] In many countries, thepostal system is run by the government, with competition forbidden by law in some or all services. Also, government monopolies onpublic utilities,telecommunications andrailroads have historically been common, though recent decades have seen a strongprivatization trend throughout theindustrialized world.
InNordic countries, some goods deemed harmful are distributed through a government monopoly. For example, inDenmark,Finland,Iceland,Norway, andSweden government-owned companies havemonopolies for selling alcoholic beverages.Casinos and other institutions forgambling might also be monopolized. In Finland, the government has a monopoly on operating slot machines (seeVeikkaus). Similar regimes for alcohol exist in theUnited States, where certainalcoholic beverage control states (ABC states), e.g.Pennsylvania andVirginia, maintain state-owned-and-operated monopolies on the sale of certain kinds of alcohol (typicallydistilled spirits and sometimeswine orbeer). In these monopolies over harmful goods or services, the monopoly is designed to reduce the 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 allows 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 asin Canada, are government monopolies.[22]
Although state monopolies are sustained throughlegislative instruments, manymajor economies have seen efforts to reform the disproportionate market powers they sustain, to therefore enhance competition.[23][24] This has been enacted throughregulatory 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).[25][26]
Across all levels of governmental jurisdiction, both structural and regulatory reforms have been preferred, as they force allmarket participants (both state monopolies and private industry) to respond to competitive pressures, as opposed to legislated regulatory structures.[27][28] This has been observed to result in moreoptimal outcomes for an economy, asresource allocation is no longer directed by legislative instruments orregulatory authorities.[29]
Despite these reform efforts to promote competitive markets, regulatory and structural reforms struggle to overcome the entrenched market dominance of state monopolies.[29] This is resultant of advantages enjoyed by state monopolies, includingfirst mover advantages.[23]
Government monopolies have traditional risks of usual monopolies:
High prices can arise
Abuse of market dominance
Furthermore, there are concerns that government-controlled entities 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.[13]
^Gordon, Richard L. (1994), "Problems of Environmental Impacts and Regulating Business Practices",Regulation and Economic Analysis, Boston, MA: Springer US, pp. 129–147,doi:10.1007/978-1-4615-2620-9_10,ISBN978-1-4613-6123-7
^abWeber 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.doi:10.54648/woco2006035.ISSN1011-4548.S2CID248274219.
^abcToole, 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.doi:10.1002/agr.20232.ISSN0742-4477.
^abBrown, 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.doi:10.1017/s1053837209090245.ISSN1053-8372.S2CID154765535.
^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.doi:10.54648/leie2021020.ISSN1566-6573.S2CID247829825.
^Asquer, Alberto (2018).Regulation of Infrastructure and Utilities: Public Policy and Management Issues. Palgrave Macmillan.ISBN978-3-319-67735-4.OCLC1015849922.
