A government-created monopoly arises when
a. government spending in a certain industry gives rise to monopoly power.
b. the government exercises its market control by encouraging competition among sellers.
c. the government gives a firm the exclusive right to sell some good or service.
d. Both a and c are correct.
The Correct Answer and Explanation is:
The correct answer is:
c. the government gives a firm the exclusive right to sell some good or service.
Explanation:
A government-created monopoly occurs when the government grants a single firm the exclusive legal right to be the sole provider of a particular good or service. This exclusive right prevents other firms from entering the market and competing, effectively creating a monopoly by law. These monopolies are often established in industries where the government believes that competition is either impractical or could harm public interest. Examples include public utilities such as water, electricity, and postal services.
Let’s analyze the options carefully:
- Option a: “government spending in a certain industry gives rise to monopoly power.”
Government spending alone does not directly create a monopoly. While government investment or subsidies can influence market dynamics, it does not automatically exclude competitors or grant exclusive rights. Monopolies created solely due to government spending are rare and indirect at best. - Option b: “the government exercises its market control by encouraging competition among sellers.”
This contradicts the idea of a monopoly. Encouraging competition means promoting multiple sellers to operate freely, which is the opposite of creating a monopoly. This is more aligned with antitrust policies, not government-created monopolies. - Option c: “the government gives a firm the exclusive right to sell some good or service.”
This is the textbook definition of a government-created monopoly. The government issues a legal barrier—like a patent, license, or franchise—to restrict market entry, making one firm the sole seller. - Option d: “Both a and c are correct.”
Since option a is incorrect or at best misleading, this combined option cannot be correct.
Why does the government create such monopolies?
Governments sometimes create monopolies to ensure reliable provision of essential services or to maintain control over critical resources. For example, the U.S. Postal Service is a government-created monopoly because it has the exclusive right to deliver first-class mail. This exclusivity is meant to guarantee universal access and maintain service standards.
Additionally, government-created monopolies can be used to promote innovation by granting patents—legal monopolies on inventions—to incentivize research and development.
Summary
In essence, a government-created monopoly arises when the government intentionally limits competition by granting exclusive market rights to a single firm, making option c the correct answer.