Monopoly Taxes

Monopolies are ubiquitous in a socio-economic system, and should be treated from the first in designing such a system. This post discussed their variety and a means of taxing them so as to minimize the negative effects.

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A monopoly is a corporation or interconnected group of corporations acting together who control a large fraction of the market share of some class of product. One could have a monopoly in a commodity, such as corn or steel or lithium, or a manufactured product, such as the works of Mark Twain or cell telephones or automobile exhaust systems, or even services, such as plumbing or visa applications or computer repair. These are examples of the class of products, or services, which could be affected by a monopoly. They could also be wide-ranging in scope, such as with a supermarket corporation which controls all imported food, not some individual food commodity, or a fossil fuel corporation, or a electrical energy corporation or many other examples.

Monopolies might be good as they could be more efficient than a myriad of other smaller companies which together met the demand for the product, or provide less expensive products, if they were able to use monopoly strength in the inverse direction, such as by demanding from non-monopolistic suppliers that they maintain low prices. They could have superior products, as if they demanded employees or subcontractors to have a high level of education and experience, as with electricians and doctors. They could have less environmental burden if they occupied less space with some centralized distribution network. Surely inventive public relations people from monopolies could come up with even more benefits.

Monopolies might be bad as they could raise prices and profits on the products they supply, as they were free from the effects of competition, or free to a sufficient extent such that their benefits outweighed their non-competitive pricing. There could easily be a time effect, with a particular monopoly using the benefits, as seen by consumers or clients, during the period of formation of the monopoly, and later a net deficit, as the profiteering from these same customers and clients became more and more dominant.

In a novel economic system, being designed to provide benefits across society, what should be the treatment of monopolies? If the government or governments in the jurisdictions being considered become involved with economics, they could well encounter monopoly situations, and may want to decide on some regulations. What to do?

There are two feedback loops involved here. One involves the growth of the monopoly. As it becomes larger, mastering a larger share of some particular product, the benefits may kick in, and its efficiency may assist in eliminating competition, simply by being more efficient or convenient for consumers and clients. The other effect that happens is that they obtain more economic power, such as saved capital, which may allow them to purchase their competition, or otherwise influence them to go out of business or merge. This can happen if monopoly effects occur in one geographic location first, allowing the amassing of capital, which is then used in another geographic location, and then another, enlarging the area where monopoly effects occur.

The second feedback loop is the typical one where the corporation begins to suborn the politicians involved in governance, so that any regulation to remedy the ill effects of a monopoly is thwarted before it is ever begun, as the corrupted politicians simply use their own public relations messages to obscure its existence or otherwise excuse their failure to take actions. Thus, two strong feedback loops serve to initiate and encourage monopolies to come into existence and grow and eventually take over the market for some product.

Infrastructure costs can assist in the formation and activity of a monopoly. If the initial costs of a transportation network, such as an airport or highway network, or a distribution pipeline, such as for water or electricity or information, or a collection system, such as waste disposal or a stock market, are very high compared to the remainder of the costs involved, no competition can afford to build a similar system, and if the infrastructure is owned by some entity that also provides services or products via the system, a monopoly is immediately in force, even without any other actions on the part of the provider. Thus there are two distinct classes of monopolies, one which is thrust into being by the necessary existence of a single network of something or other involved with a product, and another which arises without the aid of any item of infrastructure.

There may be other classes of monopolies which depend on the unique existence of some single item. For example, if there is only one known mine of a particular ore that has sufficient content of a particular commodity, and the mine is owned by one competitor, an instant monopoly exists. The same happens if the number of mines is plural, but they are all owned by one competitor, or one competitor makes covert arrangements with the owner or owners of the mines which will lead to the generation of a monopoly and the subsequent enlargement of profits for all those involved with that commodity. If patent or copyright laws disallow the use of some unique information, this is also an instant commodity.

Regulations, perhaps written by those politicians with close connections to the purveyors of a particular commodity or a service, which control the sales of it, might serve to create a monopoly. There might not even be a corporation involved in the commodity or service, just a number of individual purveyors who prefer to have entry into the group of those allowed to purvey the commodity or service limited to numbers which ensure high profits or costs to that limited number. Thus commodities can arise from limited and controlled supplies, which might be something as physical as a mine or something as intangible as regulations. This latter effect might actually be involved with improving the quality of the commodity or service, or might only be involved in giving the impression that the quality of the commodity or service is improved by the regulatory throttling of the supply. This is another effect of a monopoly that does not necessarily fall into the beneficial category or the malevolent category, but somewhere in between.

What should a socio-economic system do about such monopolies? They can only come into existence if the governance either organizes them or otherwise condones them, as with almost any other good or bad effect in the system. The socio-economic system has to work in such a way to foster monopolies for them to come into existence, and there may be multiple components of the system which have to be involved, such as finance or communication or regulation. It is necessary to go back to the goals of the socio-economic system to find out if monopolies, or a particular one, has a net benefit according to these goals. If unlimited inequality of benefits received is a goal of the system, support for monopolies would be the consequence of that choice of goal. If limitations on inequality of benefits received, distributed and consumed is a benefit, then some monopolistic arrangements might be negative in net benefit. Like everything else in a socio-economic system, the arrangements that are best are wholly dependent on the goals that are chosen. As noted elsewhere, fundamentals of the system are the allocation of benefits and their total quantity, and other goals that might be chosen, such as the ratio of manufactured products per total energy consumed, don’t have the tight connection with the population being served.

To solve the negative aspects of monopolies, government regulation can be utilized, where regulation might include both taxation and permissive or mandatory laws. Taxation is a flexible tool, as monopolies are usually involved with the provision of necessities to the population, and permissive and mandatory laws tend to interfere with it in a less gradual manner.

One form of taxation might be a simple tax based on market share. If a list of commodities can be created, and the data collection capability of the region is sufficient, market share by entity, corporation or partnership or anything else, can be calculated and a tax level on revenue or profit can be established to accomplish some aspect of the goal of both maximizing quantity of the product while ensuring its allocation is not too exclusive. Taxes on revenue is more effective as profit can be disguised very easily if management and ownership are not separated, as an individual can receive either a bounty based on fractional ownership, if that is not taxed too highly, or he could be granted a position within the entity and paid a large salary, if that is not taxed too highly. It must be remembered that human beings within a socio-economic system will incessantly game the regulations, so some ingenuity is needed to prevent the more obvious gaming tactics from being universally employed. Of course, corruption must be dealt with in this area as well as in every other area, where corruption is defined as the seeking of personal benefits by someone charged with promoting society’s benefits.

An example of a market share tax might be one on, say, the distribution of natural gas. In a region where there is only one supplier, meaning the whole region is supplied by a single corporation, there would have to be first the opening of opportunity for competition, by the ownership by governance of the means of distribution within the region and the delivery to the region. Then competitors might be taxed so that competitors with revenue under 10% of the total market share were taxed not at all, and a positive rate applied, related to higher market share. The rate would steepen as the market share approached 100%. The taxation rate curve as affected by market share would have to be chosen so as to encourage competition, in other words, to overcome the feedback effects of market share, which eventually tend to produce a monopoly and its excesses.

Any such taxation scheme would involve the definition of multiple quantities, such as the region served. And such definitions would affect the profitability of the corporations involved, and therefore would be subject to the possibility of corrupt dealing. Thus, some standards would need to be found that could be applied in default, with some requirements for special justification for deviations from the default standard. Like everything in a socio-economic system, complexity abounds.

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