INTERVENTION STRATEGIES

In discussing the problem of imperfect competition, Milton Friedman, a Nobel Prize winner and perhaps the leading conservative economist of the modern age, wrote: “There is only a choice among three evils: private unregulated monopoly, private monopoly regulated by the state, and government operation.” In this final subsection, we examine the six major approaches that governments in market economies can use to deal with imperfect competition. The first three policy measures form the core of modern policies toward big business:

1. The major method for combating market power is the use of antitrust polit)·. Antitrust policies are laws that prohibit certain kinds of behavior (such as firms’ joining together to fix prices) or curb certain market structures (such as pure monopolies and highly concentrated oligopolies). This important policy approach will be explored in detail in Chapter 17.

2. More generally, anticompetitlve abuses can be avoided by encouraging competition whenever pos-, sible. There are many government policies that can promote vigorous rivalry even among large firms. It is particularly crucial to reduce barriers ‘to entry into all lines of business. That means encouraging small businesses and not walling off domestic markets from foreign competition.

3. Over, the last 100 years, American government has evolved a new tool for government control of industry: regulation. Economic regulation allows specialized regulatory agencies to oversee the prices, outputs, entry; and exit of firms in reg industries such as public utilities and transportation. Unlike antitrust policies,- which tell businesses what not to do, regulation tells businesses what to do and how to price products. It is, in effect, government control without government ownership. In an earlier era, this approach was taken for sectors that were thought to be “natural monopolies,” such as electric power and telephone service. Today, the major area of government regulation is health care, as we will see ill Part Four, The next three strategies have been tried from time to time but are seldom used in modern market economies like the United States:

4. Government ownership of monopolies has been.approach widely used outside the United States. For some natural monopolies such as water, gas, and electricity distribution, it is thought that efficient production requires a single seller. In such cases, the real dilemma is whether to impose government ownership or government regulation on such firms. Most market economies have chosen the regulatory route, and in recent years many governments have “privatized” (or sold off to private owners) industries such as telephone companies that were formerly government enterprises.

5. Pricecontrols on most goods and services have been used in wartime, partly as a way of containing inflation, partly as a way of keeping down prices in concentrated industries. Studies indicate that these ‘controls ‘are a very blunt instrument: they lead to numerous distortions and subterfuges that undermine the economy’s efficiency. During the most recent experience with economy wide price controls in the United States, in the 19705, there were long lines for gasoline when its price was set too low, and shortages also cropped up for beef, natural gas, and even toilet paper. Placing the entire economy under price controls to curtail a few monopolists is like poisoning the entire garden to kill a few chins bugs. Today, outside of the healthcare sector, price controls are seldom used. Taxes have sometimes been used to alleviate the income-distribution effects. By taxing monopolies, a government can reduce monopoly profits, thereby softening some of the socially unacceptable effects of monopoly, But if taxation over comes the objections to monopoly based on equity, it does little to reduce the distortion of output. A non distorting tax drains profits but no effect on output, If the tax increases marginal cost, it is likely to push the monopolist even further from the efficient level of output-raising price and lowering output even more.

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