What is a Legal Monopoly?
A legal monopoly refers to a company that operates as a monopoly under a government mandate, providing a specific product or service at a regulated price. Such monopolies can be either independently run and government regulated or both government-run and regulated. Legal monopolies are also known as statutory monopolies.
The Functioning of Legal Monopolies
Legal monopolies are put in place when they are perceived as the best option for both the government and its citizens. For instance, in the U.S., AT&T operated as a legal monopoly until 1982 because providing cheap and reliable communication services to everyone was considered vital. Similarly, railroads and airlines have been legal monopolies at various points in history.
Unlike a “de facto” monopoly, which emerges without government intervention, legal monopolies are created by government entities. The rationale for creating legal monopolies often pertains to avoiding excessive prices across an industry, which would likely occur if too many competitors invest in their infrastructure. While this idea holds merit, it typically cannot be sustained indefinitely, as capitalism and technological advancement tend to level playing fields, reduce costs, and diminish entry barriers over time. Ultimately, competition often benefits consumers more than legal monopolies.
Examples of Legal Monopolies
Throughout history, governments have imposed legal monopolies on several commodities such as salt, iron, and tobacco. One of the earliest examples is England’s Statute of Monopolies of 1623, which evolved patents from letters patent (written orders issued by a monarch granting title to individuals or corporations).
Historical examples include the Dutch East India Company and the British East India Company, which were given exclusive trade rights by their respective national governments, leading to significant conflict as they defended their territories.
In modern times, legal monopolies on alcohol remain common, serving as both a source of public revenue and a means of regulation. Monopolies on controlled substances like opium and cocaine—once revenue sources—are now regulated to curb abuse. Mallinckrodt Incorporated, for example, is the sole legal supplier of cocaine in the United States.
Additionally, the regulation of gambling often involves a legal monopoly, particularly in the case of national or state lotteries. Licenses for horse racing tracks, off-track betting venues, and casinos can also be restricted to one operator by authorities.
Key Takeaways
- Legal monopolies are companies that operate with exclusive rights under a government mandate.
- They provide specific products or services at regulated prices for public benefit.
- Governments have historically imposed legal monopolies on various commodities such as tobacco, salt, and iron.
Related Terms: Monopoly, Statutory monopoly, Government regulation, Capitalism, Infrastructure.
