The Welfare Loss from Monopoly Re-visited

In a 1954 paper, A.C. Harberger claimed that the welfare loss from monopoly in United States manufacturing was less than one tenth of one percent of national income over 1924-1928. This led to additional claims of low monopoly welfare loss and eventually to a counter-argument in favor of including rent seeking as part of this loss, an inclusion that could significantly raise the loss. In the present paper, government encourages or discourages monopoloies as necessary to maximize its political support. The political support maximum depends on the nature of the political system and, in particular, on how inclusive it is. The same is true of the monopoly welfare loss, which becomes largely the social cost of rent seeking plus the social cost of protectionism - or of protecting existing profits by restricting investment that would increase competition in markets where these profits are earned. Protectionist measures lower innovation and technological progress, but can still be a good source of political support. This combination of low efficiency, but high political support, can explain the persistence of inefficiency and of large differences in total factor productivity between nations.