What Is a Government Monopoly?

by Tom Lutzenberger - Updated June 29, 2018
Low Angle View Of Post Office Against Blue Sky

A monopoly involves one business entity controlling, in practical terms, a particular market. Since the introduction of antitrust laws in the 1930s, the federal government has been opposed to monopolies in general. However, the government also protects and controls specific markets as well. This may seem hypocritical, but there are sound reasons for it.

What is a Government Monopoly?

When the government allows or creates a monopoly within a market, that is in essence a government monopoly. The government is either directly or indirectly the only provider of a necessary service or product and other competition is not allowed. Essentially, governments create monopolies to keep the prices of such amenities within all consumers' reach.

When the government allows a private entity to have this power, it is called a government-granted monopoly, but is often also a natural monopoly. Many electricity and water utilities are examples of this alternative. Natural monopolies often arise due to the rarity of a material used in production or to high production costs, which causes a natural lack of competition. As with government monopolies, the purpose of allowing government-granted or natural monopolies to exist is partly is to regulate costs within affordable levels and control growth and development. For comparison, think of power utilities operating as monopolies with explicit government sanction versus cable companies and internet service providers who become functional monopolies though mergers or geographic segmentation. The consumer price index of each of the latter 2 industries can vary widely or rise sharply due to a lack of government regulation or control.

A government monopoly can be at any level of government, from national down to the city or special district level. The only distinction in name to discern the level of jurisdiction tends to be national, regional or local (that is, a national monopoly or local monopoly).

Government Monopolies We Use Everyday

Some functions, depending on the country, remain under standard control of the government. For instance, in Germany the postal service and train service are national government operations. In Nigeria, the land phone system is government owned and operated.

In the United States, the postal service is entirely government operated. However, this doesn’t necessarily create a monopoly per se. For instance, U.S. shipping can be performed through FedEx, DHL or UPS. So the U.S. Postal Service doesn't currently dominate the market. On the other hand, the German public train system is entirely government run; there are no private competitors. That is a true monopoly.

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Why Have a Government Monopoly? The Scandinavian Example

Many times, government monopolies are created to guarantee a public service or to protect the public from harm. In Scandinavian countries, alcohol and drinking are serious concerns. To control the damage caused by alcoholism, particularly with regard to health and driving, the government only allows alcohol sales through government stores. The prices are kept high and the amount bought is limited. Clearly, the government has asserted a monopoly for the purpose of protecting people’s health.

Why Have a Monopoly? The Canadian Example

In Canada, the healthcare system is government controlled. Competition is not allowed, and the industries that do exist are government-approved monopolies. The intent is to make sure everybody receives a certain standard of healthcare. While the system is good for many needing basic care, those few needing special care may not receive the best treatment as they might in a competitive market. But the Canadian government believes the majority benefit from the program.

Why Government Monopolies are a Bad Idea

Opposition to government monopolies tends to focus on those that are government granted. It essentially favors one business over another versus creating another government program. The downside of favoring a business is that it creates an inefficient provision of a service or product. The favored business has no incentive to improve; its profits are guaranteed by the government. As a result, there is no true customer service or quality assurance. In comparison, competition instead forces companies to stay the best or lose market share, which in turn is assumed to be better for the customer.

A Work in Progress

Government monopolies exist because some services have to exist for everyone with their availability not being subject to market forces or the ability to pay. Other reasons include protecting the public welfare. However, subsidizing a favored business creates inefficiencies and can risk producing an inferior product or service for all customers. There is no perfect answer to the issue; government monopolies will continue to be a work in progress subject to political and public interests.

About the Author

Since 2009 Tom Lutzenberger has written for various websites, covering topics ranging from finance to automotive history. Lutzenberger works in public finance and policy and consults on a variety of analytical services. His education includes a Bachelor of Arts in English and political science from Saint Mary's College and a Master of Business Administration in finance and marketing from California State University, Sacramento.

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