James d. Gwartney

Video:
Political Versus Market Choices
Government planners may try to estimate the benefits and costs, but their estimates, to a
large degree, will be guesses because they lack solid information based on the choices of
buyers and sellers. Further, in the real world, such benefit-cost calculations will often be
influenced by political considerations.
As the quotation from Thomas Jefferson introducing this element indicates, it is vitally
important for government to restrain people from imposing harm on others (the government’s
protective function). Economics also indicates that there is a case for government provision of
goods that are difficult to supply through markets (the government’s productive function).
However, as the government moves beyond these activities, the case for still more government
weakens. In order to better evaluate the economic role of government, developing a deeper
understanding of the shortcomings of markets and applying the tools of economics to the
operation of the political process are important.
Read:
Not Yours to Give by Edward Ellis

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143
Regulate Monopolies
People of the same trade seldom meet together, even for merriment and
diversion, but the conversation ends in a conspiracy against the public, or in
some contrivance to raise prices.
— Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
If a society is going to get the most out of its resources, the resources must be used efficiently.
Competition is central to this efficient use. As previously discussed, businesses operating in a
competitive environment have incentives to cater to the views of consumers and produce
goods and services economically. If businesses do not provide consumers with value for the
price they pay, they will spend their money elsewhere.
A monopoly exists when there is a firm that is the only producer of a good or service
for which there are no good substitutes. When this is the case, the firm will have an incentive
to restrict output and raise price. By producing a smaller quantity and charging a higher price,
the firm may be able to earn more profit than it would if resources were being used more
productively—producing a larger quantity at a lower price. Inefficiency will result because the
firm is failing to produce some units of the good or service that customers value more than
their cost of production.
There are two major sources of monopoly: economies of scale and grants of privilege.
Economies of scale occur when large firms have lower per-unit costs than their smaller rivals.
If economies of scale persist as a firm obtains a larger and larger share of the market, a single
firm will dominate and become a monopoly. The production of electricity provides an