Examine how the private and public sectors contribute to an economic system.

In every mixed economic system, there is a private and public sector. The private sector is comprised of individuals and privately owned businesses that work, provide goods and services, and purchase them from others. The public sector is defined by governmental or communal economic activities. For example, the government collects taxes to fund a variety of activities and programs. These are public sector functions.

As noted in the previous section, the United States economic system is a mixed economy, but it is primarily capitalistic in its tendencies. This means that we rely primarily on the private sector to supply needed goods and services and produce beneficial outcomes for individuals and society. To be an effective, informed participant in the American economic and political systems, it is important to understand the balance between the public and private sectors in the United States. If you were asked to review a list of ways the public sector regulates the economy, it might seem that there is no rhyme or reason to it. However, free market economists have identified several circumstances in which the private sector cannot provide what individuals and society needs. Such circumstances are deemed “market failures,” and public sector intervention is justified. The most widely accepted examples of market failure are (1) monopolies, (2) the underprovision of public goods, (3) negative externalities, (4) incomplete markets, (5) information shortages, and (6) high unemployment and inflation rates.

Monopolies and the Failure of Competition

For the market to produce efficient outcomes, there must be competition. In some instances, however, a firm might acquire all or almost all of the means of production in a particular market. If a single firm is the sole provider of a good or service, it has a monopoly. However, not all monopolies are created equal. Some monopolies are insignificant; for example, a gasoline monopoly in a small town would not raise nearly the same concern as a gasoline monopoly for the entire nation. Additionally, even though a corporation approaches 100 percent of the market share in an industry, it is not necessarily a monopoly. So long as reasonable substitute products exist and potential competitors do not experience insurmountable barriers to market entrance, a firm cannot be said to be a monopoly. For example, Microsoft has a commanding market share (about 90 percent) in the operating system and office software sectors, but it is not a monopolistic firm because other, although less popular, platforms and operating systems exist.

When monopolies exist, competition does not. That is the key defining criteria of a monopoly — if there are significant, perhaps insurmountable barriers to overcome before another firm or individual can compete with a firm in a particular market, the existing firm is a monopoly. Monopolies cause the market to fail because monopolists tend to restrict the production of goods or the provision of services and increase prices for them above the natural market level under competition. Antitrust laws on the books allow government regulators to go after and break up trusts or monopolies if they can be shown to be artificially restraining competition or trade. Some “natural monopolies,” such as sewer, phone, gas, and electrical companies, are allowed to exist, but they are regulated public utilities that do not have the ability to set prices like private firms do.