Do monopolies undermine the environment?
For many skeptics of the environmental benefits of market economies, the fear of monopoly control over natural resources is one of their greatest concerns. The reality is actually much more complicated; here’s why.
- Most natural resource industries are not controlled by monopolies, and are in fact characterized by a high degree of competitiveness. Agriculture, forestry, and fishing industries are almost everywhere characterized by markets with hundreds or thousands of players, some of them big but with plenty of smaller players as well. While limited degrees of market power exist in some of these industries in some areas, on the whole they are actually some of the more competitive industries in the world. Even energy and mineral industries are fairly competitive, and where they are not they are characterized by oligopoly structures, almost never a monopoly.
- Monopolies restrict output and raise the price of goods above their marginal costs (which leads to a loss of social welfare), which is why economists (mostly) consider them bad. But from an environmental perspective, they may actually be quite good, since they lead to lower resource use and higher prices. For example, if oil was a completely competitive market, the price would be lower and we would burn even more of it than if OPEC kept the price artificially high! The problem the environmentalist faces is not that monopolies keep prices high and limit output (that’s called conservation), but that this has a regressive effect and hurts the poor. (By the way, this is one of the biggest issues that confront environmentalists more generally, who for the most part would like to see resource prices rise.)
- As to examples where monopolies restrict R&D or limit technological innovation — there certainly are examples of this, but in general, the profit motive is sufficient to overcome it. Bottom line: the cheap prices of resources are the greatest threat to advances in efficiency, and monopolies lead us in the opposite direction.
- There are examples of what economists call “natural monopolies” where fixed costs are so high that only one company can be profitable providing a given service in a given region; examples are water, telecommunications, and electricity (imagine if every provider of water had to build their own pipe system). In cases where natural monopolies arise, it is much more efficient for society to grant the company limited monopoly rights and regulate them. These are often called public utilities and abound in America (PG&E is my public utility in CA). The problem with public utilities is that often the regulators force them to charge very low prices that favor consumers but, again, lead to increased use of resource; that is, if the monopolies were unregulated, we would see lower resource use.
- Let us not forget that the biggest monopolies in the history of humanity are state-owned. The monopolies in the former Soviet Union were certainly the biggest ever (and the worst environmental offenders the world has ever known), and even today state-run monopolies for all sorts of resources (primarily oil, gas, and telecommunications) abound. Almost without fail, they are characterized by high prices, poor service, and abysmal environmental records.
- Since competitive markets are one of the foundations of a prosperous economy, market-based societies have developed various forms of anti-trust legislation to ensure relatively high degrees of competition in most markets. Laws regulating market share, anti-competitive pricing, etc. are commonplace in all of the advanced market systems, and have a relatively good record of success. Probably the greatest success has been in the telecommunications industry, where deregulation has led to real price declines of almost 95% in telecommunications fees over the past 25 years. (Examples of the failure of states to break up monopolies abound in Latin America, particularly in telecom. I have written about how Telmex in Mexico is one of the most egregious examples of robbing from the poor to give to the rich and how it is a great impediment to Mexico’s economic development. What the Mexican telecommunications industry desperately needs is more market-based competition to break Telmex’s grip; unfortunately, due to immense corruption, the average Mexican must continue to spend large shares of their meager earnings on phone calls.)
- Probably the biggest pro-competition policy is free trade and globalization. The greatest threats to regional and national monopolies come from trade from abroad and the innovation that trade accelerates. Contrary to popular wisdom, globalization does not increase the power of corporations over individuals, but just the reverse; people can shift their business to the other companies more easily as their choices increase. If you doubt this, just look at how lists of the “Fortune 500” companies continually shift every few years, and even more so in this more globalized age.
In summary, while economists have long ago identified the pros and cons of monopolies, how they interact with environmental outcomes is not entirely straightforward. What is obvious is that in non-market-based economies we witness the worst forms of monopoly abuse and the resulting environmental degradation.