What Is a Legal Monopoly?
A legal monopoly refers to a company that is operating as a monopoly under a government mandate. A legal monopoly offers a specific product or service at a regulated price. It can either be independently run and government-regulated or both government-run and government-regulated. A legal monopoly is also known as a “statutory monopoly.”
How Legal Monopolies Work
A legal monopoly is initially ordered because it is perceived as the best option for a government and its citizens. For example, in the U.S., AT&T operated as a legal monopoly until 1982 because it was deemed vital to have cheap and reliable service readily available to everyone. Railroads and airlines have also been used as legal monopolies throughout history.
A legal monopoly materially differs from a “de facto” monopoly, which refers to a monopoly that is not created by a government entity.
The prevailing idea behind instituting legal monopolies is that if too many competitors invest in their delivery infrastructure, prices across the board in a given industry will climb unreasonably high. While this idea has merit, it does not sustain itself indefinitely because, in most cases, capitalism eventually wins out over legal monopolies. As technologies advance and economies evolve, playing fields typically level out independently. Consequently, costs drop, and barriers to entry diminish. In other words: competition ultimately benefits consumers more than legal monopolies do.
Examples of Legal Monopolies
Throughout history, various governments have imposed legal monopolies on multiple commodities, including salt, iron, and tobacco. The earliest iteration of a legal trust is the Statute of Monopolies of 1623, an act by England’s Parliament. Under this statute, patents evolved from letters and written orders issued by a monarch granting title to an individual or a corporation.
The Dutch East India Company, British East India Company, and similar national trading companies were granted exclusive trade rights by their federal governments. Private freelance traders operating outside the scope of those two companies were subject to criminal penalties. Consequently, those companies fought wars in the 17th century to define and defend their monopoly territories.
Legal monopolies on alcohol remain relatively common as a source of public revenue and a means of control. Meanwhile, monopolies on opium and cocaine—once important revenue sources—were converted or re-instituted during the twentieth century to curb the abuse of controlled substances. For example, Mallinckrodt Incorporated is the only legal supplier of cocaine in the United States.
Gambling regulation often includes a legal monopoly concerning national or state lotteries. The authorities may license only one operator where private operations are allowed with businesses like horse racing tracks, off-track betting venues, and casinos.
KEY TAKEAWAYS
- Legal monopolies are companies that operate as a monopoly under a government mandate.
- Legal monopolies are created to offer consumers a specific product or service at a regulated price.
- Various governments have imposed legal monopolies on multiple commodities, including tobacco, salt, and iron.
