Government-Granted Monopoly

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Government-Granted Monopoly

What It Means

A government-granted monopoly is a legal form of monopoly in which the government grants one individual or corporation the right to be the sole provider of a good or service. When a government grants a monopoly, it often regulates the price of the product or service that the firm holding the monopoly may charge its customers. In some cases of government-granted monopolies, the government identifies itself as the sole provider of the good or service. Government-granted monopolies are usually established because they are perceived to be the best option for producers and consumers.

In the United States, for example, AT&T functioned as a government-granted monopoly from 1913 until 1984. The federal government reasoned that Americans needed affordable and reliable telephone service; it also thought that the communications industry could only sustain one producer because operating costs (the telephone poles and lines, the call centers, the research and development, the repairs, and the monthly power bills, to name just a few expenses associated with running the enterprise) were so high. A phone company could only make money if it was large and served numerous customers, so that the average cost of serving each individual customer would be reduced. The best way to ensure that AT&T would have the appropriate customer base was to eliminate the prospect of competition. Prior to the 1990s energy companies in many developing nations operated as government-granted monopolies for the same reason that AT&T enjoyed this privilege for a time in the United States.

When Did It Begin

The British East India Company and the Dutch East India Company were two of the earliest government-granted monopolies. Queen Elizabeth I of Great Britain granted the British East India Company a royal charter on December 31, 1600. The charter gave the organization a 21-year monopoly on all trade between England and the East Indies. The British East India Company acquired considerable authority in India because, over time, the English government bestowed political and military powers on the company so that it could protect England’s interests in the colony. The British East India Company had holdings elsewhere in Asia, as well as in Africa. In 1858 England dissolved the British East India Company after a series of uprisings against the company known collectively as the Indian Mutiny.

The Dutch East India Company received its charter in 1602 from the States-General of the Netherlands. Like the British East India Company, the Dutch East India Company was granted a 21-year monopoly on trade in Asia. The first company in the world to publicly trade its stock (offer shares of ownership to private investors), the Dutch East India Company was highly profitable for nearly 150 years before the sugar trade declined and shipments were increasingly lost to pirates at sea and gangs on land. The company was dissolved when it went bankrupt in 1800.

More Detailed Information

One of the sectors in which governments often grant monopolies is public transportation. Robert Fulton (1765–1815), the U.S. engineer who developed the steamship, was granted a monopoly by the state of New York; he was named the sole provider of steamboat transportation for passengers traveling the Hudson River between New York and Albany. Working with partner Robert Livingston (1746–1813), Fulton had launched the first successful steamboat up the River Seine in France on August 9, 1803. Fulton returned to the United States to perfect his invention. In 1807 he launched the North River Steamboat (later called the Clermont), which became the nation’s first commercial steamboat. The first successful trip from New York to Albany left port on August 17, 1807, and arrived two days later. In total the journey lasted 52 hours. The return to New York from Albany took just 36 hours. Commercial operations began on September 4, 1807. The ship left New York every Saturday evening at six. The return run left Albany every Wednesday at eight in the morning.

Fulton’s state-granted monopoly was scheduled to last 30 years. Steamboat entrepreneur Thomas Gibbons (1757–1826) challenged the validity of the agreement, however, by hiring Cornelius Vanderbilt (1794–1877) to transport passengers for a cheaper fare. The duo eventually broke Fulton’s monopoly in 1824, when the federal government ruled that New York could not regulate commerce in that manner. Following the ruling, steamboat fares dropped almost immediately from seven dollars to three dollars. Even so, in many metropolitan areas today, public transportation on the roads and in the subways is run by companies that have been issued a monopoly. For example, in New York City the Metro Transit Authority operates the city’s buses and subways. In Boston, the Massachusetts Bay Transportation Authority provides public transportation.

The United States Postal Service (USPS) also holds a legal monopoly. It is the only agency permitted to put mail in private mailboxes. Until 1979 the USPS was the only agency in the country that delivered letters. That year, however, the post office agreed to exempt extremely urgent letters from the terms of this monopoly. Since that time couriers, such as Federal Express (FedEx) and the United Parcel Service (UPS), have been permitted to deliver letters under certain conditions. Competing providers are required to charge at least three dollars for their services (or twice the rate of the USPS), and they are not permitted to leave letters or packages in private mailboxes. Carriers and citizens are not permitted to send nonurgent materials through agencies other than the USPS, but this stipulation has proved to be impossible to enforce.

Governments can also grant monopolies in the form of patents, which provide innovators with the exclusive right to make, use, and sell their invention for a specified number of years. In the United States patents are often granted in the pharmaceutical (medicinal drug) industry. The reasoning behind this practice is that the patents will encourage the pharmaceutical companies to invest funds in medical research and the development of new products, as well as in marketing (promoting, selling, and distributing) these products. In exchange for developing new prescription and over-the-counter medications, the patent allows the company to sell them for a period of time without any competition. Whereas the government regulates the prices that the post office charges, however, no such regulation exists for pharmaceutical companies. Free to charge what the market will bear, drug companies have been raising prices at an alarming rate since the mid-1990s. For example, the price for Claritin, a top-selling allergy pill, was raised 13 times before the drug’s patent expired. By the first years of the twenty-first century, the average senior citizen was paying $1,500 per year for prescription medications.

Recent Trends

Since the early 1990s the general trend throughout the developed economies of the world has been away from government ownership of utilities (water, sewage, light, power, and trash collection services) or government-granted monopolies running these businesses. Instead, these services have been privatized, or turned over to private control and ownership. Experts cite two main reasons for this trend. First, government-run companies and companies with no competitors tend to be more inefficient than companies that must compete for a client base. Thus it was widely believed that utility companies could both be more profitable and yield better services if their customers were free to choose among service providers. Secondly, governments throughout the world were increasingly coming under financial strain in the early 1900s, and it was believed that higher returns would be reached if utility services were deregulated. In 1994 $69 billion was raised worldwide from privatization. The following year $62 billion was raised. Australia, Italy, and France experienced the greatest profits.

Privatization of utilities has also become common in the developing countries of the world. Between 1990 and 1997 more than 25 developing economies privatized their natural gas companies. For-profit companies, which began providing natural gas to residential and commercial customers, attracted a large amount of foreign investment, further stimulating growth in the industry. During this time private investors initiated many lucrative projects involving transporting natural gas across international boundaries. The projects included the development of the Yadana gas pipeline from Myanmar to Thailand, the Maghreb gas pipeline from Algeria to Europe, and the Gas-Andes pipeline from Argentina to Chile, all of which would have been less feasible if there had been heavy regulation of the utilities industries in these countries.

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Government-Granted Monopoly

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Government-Granted Monopoly