Government Reactions to Monopolies

1. Government Reactions to Monopolies Economics 2/7/12

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.