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Legal Monopoly: Definition & Examples

Legal Monopoly: Definition & Examples
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  • 0:03 Introduction to Monopolies
  • 0:27 Definition
  • 1:08 Factors Affecting…
  • 1:54 Examples of Legal Monopoly
  • 2:33 Example
  • 3:19 Lesson Summary
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Lesson Transcript
Instructor: Lesa Dowdy
In this lesson, we will learn about legal monopolies. We will define the term, look at contributing factors, and apply the term to a real-life example. This will be followed by a summary and a quiz.

Introduction to Monopolies

Let's say you and your family decide to move to a new town. After you find your dream house, you get busy contacting all the utility companies. When trying to find a local telephone service provider, you are only able to locate one company that offers this type of service. You decide to ask some of your neighbors what options they have for phone services and find out that there is only one company in town that is available. What you have just experienced is a legal monopoly.

Definition

Right now, you may be asking yourself, what exactly a legal monopoly is. Well, first it is important to explain the general term, monopoly. A monopoly is a firm that offers a good or service that has no close substitute. It exists when there is only one supplier, and there's a barrier that prevents new firms from entering the market and providing competition.

Now, let's look at what a legal monopoly is. Much like a general monopoly, there is just one provider of a good or service. However, a legal monopoly is given support and rights by the government, either nationwide or in a specific area. In exchange for the support and rights by the government, the government then has the right to monitor and regulate any activities, rates, and policies.

Factors Affecting Legal Monopoly

Let's look at the factors that affect a legal monopoly. In a monopoly there cannot be any close substitutes for a good or service. The bottom line is, a close substitute equals competition. Competition cannot be present in a monopoly.

When technology improves, new products can be created. These new products can therefore create a substitute for the goods that are produced by monopolies. This can jeopardize a monopoly. Some examples of this can be found within the industry of package delivery. The postal service used to be the main way packages were delivered. However, once other carriers such as UPS and FedEx came about, the monopoly of the postal service was weakened.

In order for a monopoly to be legal, the government needs to be involved. This often comes in the form of price regulation.

Examples of Legal Monopolies

Now that we know what a legal monopoly is, let's look at some examples to help explain this concept. As mentioned earlier, the U.S. Postal service is a legal monopoly. While there are a few other companies that offer the delivery of packages, the post office offers both the delivery of packages and mail. They are still the dominant delivery system when it comes to mail delivery.

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