David R. Henderson  

Mankiw's Missing Solution

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I'm using some of the chapters of Greg Mankiw's economics textbook, Essentials of Economics, in an Energy Economics class I'm teaching. Most of the students have never taken an economics course or took one more than 7 years ago. I've liked it pretty much so far, but the chapter on monopoly has one huge gap.

Early in the chapter, Mankiw identifies barriers to entry as "the fundamental cause of monopoly" and lists 3 types of barriers:
1. Monopoly resources: A key resource required for production is owned by a single firm.
2. Government regulation: The government gives a single firm the exclusive right to produce some good or service.
3. The production process: A single firm can produce output at a lower cost than can a larger number of producers. [In other words, natural monopoly.]

I then use the George Stigler article on Monopoly from The Concise Encyclopedia of Economics, an article in which Stigler emphasizes that #2 above is the most important of the three. Stigler writes:

Even today, most important enduring monopolies or near monopolies in the United States rest on government policies. The government's support is responsible for fixing agricultural prices above competitive levels, for the exclusive ownership of cable television operating systems in most markets, for the exclusive franchises of public utilities and radio and TV channels, for the single postal service--the list goes on and on.

Later in the chapter, in a section titled "Public Policy Toward Monopolies," Mankiw lists 4 ways that policymakers in government "can respond to the problem of monopoly." They are:

1. By trying to make monopolized industries more competitive,
2. By regulating the behavior of the monopolies,
3. By turning some private monopolies into public enterprises,
4. By doing nothing at all.

Under #1, his discussion is exclusively about the use of antitrust laws. Mankiw has way too much confidence in such laws. See Fred McChesney, "Antitrust," The Concise Encyclopedia of Economics, for why I say that.

But that's not my main criticism. What do you see missing in #1 of the solutions that one would naturally think of, given #2 of the causes?

HINT: Go to the Institute for Justice web site and click around on it for a while.


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COMMENTS (13 to date)
John Thacker writes:

Naturally, repealing the government regulation that gives exclusive rights to the monopoly.

I agree with John Thacker. Government could actively undo its earlier folly. At least I can imagine this happening.

JohnW writes:

I've often thought that we need a fourth branch of government -- an elected congress whose sole responsibility is to examine existing laws and repeal the bad or outdated ones.

MattF writes:

Armentano's Antitrust and Monopoly is outstanding on this question.

AngryKrugman writes:

Does it really need to be stated if it's so obviously implied? If the government grants a single firm the monopoly, clearly it can "remedy" that by revoking the grant. Doesn't really seem like this is an issue that merits much discussion.

Further, couldn't one simply read #2 as something the government doesn't view as a "problem" of monopoly? The government knows it's granting a monopoly, but has decided the other policy reasons for doing so--subsidizing postal delivery to rural delivery areas, for instance--outweigh the costs of monopoly. It's not really worth listing as a "solution" because the government has already decided the monopoly isn't a "problem" in this case. That's not to say you can't disagree on the merits of those policy choices, but rather it wouldn't really make sense to note revocation as a solution in these cases.

Alex J. writes:
3. By turning some private monopolies into public enterprises

That is, public monopolies.

david writes:

Public monopolies can be given a mandate toward goals besides profit-maximization.

The greatest value of antitrust is the refusal to enforce trusts rather than the dismantling of perceived monopolies, really. The absence of state action is crucial here.

Surprised nobody ever points out perfect price discrimination as a solution to monopoly pricing.

Brandon Berg writes:

Since you referenced IJ, I assume the answer you had in mind is scaling back or abolishing licensing requirements, of which granting a monopoly is the extreme case (only one firm is licensed to operate).

BH writes:

"Does it really need to be stated if it's so obviously implied? If the government grants a single firm the monopoly, clearly it can "remedy" that by revoking the grant. Doesn't really seem like this is an issue that merits much discussion."

If you've every taught principles of microeconomics to undergraduates, then yes, it definitely needs to be stated. I like to use Gwartney, Stroup, Sobel, and MacPherson for principles. They emphasize the point that removing government-created barriers to entry is a very effective way to combat monopoly.

Nickolaus writes:

Mankiw has more faith in the State than most Republicans, and that is saying a lot. From what I can tell, he has approximately zero philosophic consistency and seems to randomly select which areas of life the government can "effectively" intrude on.

R Richard Schweitzer writes:

#2 stated a bit more in line with what occurs under conditions of representative governments (which operate as the representation of interests):

A group of interests attains access to the uses of the mechanisms of government sufficiently effective for a desired degree of status quo dominance of that production or distribution which their resources permit.

I second BH, above. Yes, sometimes the obvious needs to be stated. First, because people commonly start persuasive arguments with statements of (obvious) accepted axioms. Second, because the persistence of rent-seeking State-monopoly enterprises demonstrates that the basic point is not obvious to many people.

For example, policies in many US States restrict parents' options for the use of the taxpayers' age 6-18 education subsidy to schools operated by dues-paying members of the NEA/AFT/AFSCME cartel. The US "public" school system qualifies as a monopoly.

A digression if I may: the argument for tax subsidization of public goods (e.g., schooling, to whatever extent schooling is a public good) contains a flaw. The State cannot subsidize the production of a good (e.g., schooling) without a definition of that good. Corporate oversight is a public good and the State itself is a corporation. State assumption of responsibility for the provision of public goods transforms the free rider problem at the root of public goods analysis but does not eliminate it.

R Richard Schweitzer writes:

We have to keep in mind what the uses of government mechanisms entail; such as patents, prejudicial or preferential structuring of regulations (even such things as EPA), emminent domain, zoning, "allowed" forms of affiliation (business organization legislation), etc., etc.

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