Transcript Government Reactions to Monopolies

Government Reactions to
Monopolies
Economics
2/7/12
Why should government intervene?
• As discussed earlier, monopolies produce
too little and charge too much.
• Nobody is in a position to stop a monopoly
except for the government.
• That is, unless the government is the one
causing the monopoly in the first place.
• Then they should just gtfo of the way.
What can governments do?
• In order to stop monopolies from profiting
from a loss to society, government can:
– Set quotas to guarantee sufficient production
– Set price ceilings to limit price gouging
– Subsidize another competing company
– Forcibly split the monopoly into two or more
competing companies
– Steal (I mean, “nationalize”) the company,
making it belong to the government and pay
all profits to the government coffers.
Why don’t they do these things all
the time?
• Every action the government takes to
intervene in a market has a cost.
• Sometimes, the cost of government
intervention outweighs the cost of letting
the monopoly be.
Price and Quantity controls
• If the government sets a price and quantity for a
monopoly, it might improve the situation then…
• However, the government would have to set new
prices and quantities every time something
shifted either the supply or demand curve.
• Governments can’t even know for sure if they’re
setting the right price in the first place, let alone
after market shocks constantly change the
picture.
Subsidies to Competitors
• Obviously, the government loses money equal to
the amount it pays to subsidize the competition.
• Also, after the subsidized company gets going, it
will become an even stronger monopoly than the
old one because it’s getting a subsidy
• The government has a horrible track record of
taking subsidies away later, because the
company will use the some of the subsidy
money to buy politicians. Endless cycle.
Forcibly Dividing Monopolies
• Dividing a company into multiple other
companies forces it to compete against what
used to be itself.
• The new companies may be less efficient than
the old one was – neither may make as much
profit, but that may be due to stupidly increased
costs.
• It feels like a violation of somebody’s property
(and therefore the constitution) to take half of his
company and give it away to somebody else.
Government take-over
• When the government “nationalizes” (read:
steals) a monopoly, it is possible that they will
think about The People more than profits.
• Also, any profits they make theoretically go to
“The People”
• Unfortunately, government companies let profits
fall, but they also let quality suffer.
• Also, government take-overs of the most
profitable corporations discourage people form
investing in that country for fear of theft.
Conclusion:
• Government actions are often necessary
to prevent a monopoly from hurting
society.
• However, government actions carry their
own costs, so we must be very judicious in
deciding when and how government
should intervene.