Wednesday, December 30, 2009

Why monopolies are bad (with applications to education and healthcare)

I live a few blocks from two movie stores, Blockbuster and Hollywood Video. A month ago, the Blockbuster store began a Going Out of Business sale. That leaves the Hollywood Video store as the only movie store for several miles in every direction. I was surprised to find out, last night, when I stopped at Hollywood to pick up a movie at 10:55pm that the store was closing in five minutes. I was shocked... how can a movie store close at 11pm on a Friday night?? I asked the clerk when they started closing at 11pm. It's been since a few weeks ago. She claimed that it's because business is too slow after 11pm. But when she let me out of the store, locking the door behind me, two cars pulled up, and the customers walked up to the door, shocked to find it locked.

After puzzling on this for a few minutes, it struck me that the new Hollywood hours were instituted right about the same time Blockbuster put up the Going Out of Business sale signs. Why should Hollywood stay open past 11pm for the convenience of those last few late-night stragglers when Blockbuster is no longer across the street, staying open for late-night stragglers? Blockbuster had to stay open till midnight because Hollywood did and vice-versa. But now that Hollywood has a monopoly of sorts in this area, they can require their customers to plan around the store's convenience, rather than the other way around. Both Blockbuster and Hollywood were likely losing money staying open that last hour from 11pm to midnight, but they had to absorb that loss or risk losing customers to their rival.

As I have explained on these boards in the past, the public education system creates a monopoly on low- and mid-level education by subsidizing the government schools so they can offer $0 tuition. It is impossible to compete with $0 tuition, so only private schools which cater to high-end, wealthy customers (and some religious schools) can co-exist with the subsidized state schools. But the monopoly on education is bad for customers (parents & children) in the same way that Hollywood's lucky monopoly on movie store presence in this area of town is bad for customers. The customer must adapt his life around the convenience of the monopolist. In a competitive market, the producers must cater to consumers' demands or risk losing potential repeat business to their competitors.

The clamor for universal health care (monopolization through subsidization) is like customers wishing for Blockbuster to close up shop to give Hollywood a monopoly on videos. The only beneficiaries are the monopolist and its employees (and stockholders). This can only lead to a reduction in the quality of healthcare, just like the reduction in quality of education which we have experienced under state monopolization of education and just like the reduction of quality I experienced from Hollywood Video last night.

Unfortunately, the political opposition to universal health care has not prosecuted the argument from this point of view, the root cause of the degradation in quality which can be predicted to occur as health care becomes more heavily subsidized by the state: monopolization. Instead, the argument is over whether the state budget can fit universal health care or whether "socialized medicine" can't work for mysterious, unstated reasons apparently related to its being "socialist". If government can successfully produce education, art and all the other things that it is attributed to be able to produce, there is no good reason that it cannot produce health care. The only really convincing argument against universal health care is to address how monopolization inevitably results in a degradation of quality and increase in costs... which indicts all the services which the state monopolizes.

Just as with public education, public health care will, predictably, result in a degradation of health care quality and a rise in health care costs for the same reason Hollywood Video charges a dollar more than they did a few months ago and now close an hour earlier than before.

Walter Williams applies Frederich Hayek's - Nobel Prize winner in economics - knowledge problem to the issue of health care in this brief, incisive article. I strongly recommend everyone read his remarks.

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