Mankiw's Missing Solution
By David Henderson
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.