Abstract
In a 1954 paper, A. C. Harberger claimed that the welfare loss from monopoly in United States manufacturing was less than one tenth of one percent of national income over 1924-1928. This led to additional claims of low monopoly welfare loss and eventually to a counter-argument in favor of adding a rent-seeking cost equal to part or all of the economic profit to this loss. These arguments assumed a passive role for government. In this paper, by contrast, governments are active and seek to maximize their political support. The political support maximum then depends on the nature of the political system and, in particular, on how inclusive this system is. The same is true of the monopoly welfare loss, which becomes largely the social cost of rent seeking plus the social cost of protectionism—or of protecting existing profits by restricting investment that would increase competition in markets where these profits are earned. Protectionist measures lower innovation and the growth of total factor productivity, but can still be a good source of political support in a political system where inclusiveness is moderate to low. This can explain not only the existence of inefficiency and of large monopoly welfare loss, but also their persistence and the persistence of large differences in total factor productivity between nations.
Highlights
This paper re-visits the ‘welfare loss from monopoly,’ a subject first raised by A
The contribution of the present paper is to address this omission by showing what happens when government is explicitly modeled as a maximizer of political support, as in International Journal of Business and Economics Research 2021; 10(4): 141-146
The argument that monopoly welfare losses are small relative to national income led to efforts to uncover further costs of market power, and this is how rent seeking became the major part of this loss [20, 11, 16]
Summary
This paper re-visits the ‘welfare loss from monopoly,’ a subject first raised by A. The monopoly welfare loss can be larger and more persistent than in Harberger, Schwartzman, Carson [6], or Worcester because of greater rent seeking and/or lower rates of investment, innovation, and technological progress. At F, a ‘deadweight’ loss equal to the area of triangle FBL arises because by lowering P from PF to PB and shifting all resources out of rent seeking, it would be possible to increase Q from QF to QB and consumer plus producer surplus by area FBL. This is still not a welfare optimum, until the restrictions on investment that protect monopoly profit at F are removed. Are there nations without rent seeking based on preferential treatment by government? Angelopoulos, Philappopoulos, and Vassilatos ([3], p. 280) mention Ireland and the Netherlands as the only countries in Europe where such rent seeking was essentially zero over 1980-2003
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