Dismantling a State Monopoly: Insight from Theory

We analyze competition with taxation as an alternative to state monopoly by highlighting the importance of the industry's cost structure and the external cost of consuming the good. Under government revenue maximization assumption, competition is a better alternative to state monopoly if and only if the state monopoly has diseconomies of scale or is producing in the range of output where there are diseconomies of scale. The result is unchanged even when the government also accounts for the social cost of consuming the good. However, in this case, total output will be higher than the monopoly output only if the social cost of consuming the good is too small, that is it is lower than a determined threshold value. Interestingly, the analysis also showed that under both assumptions, oligopoly is a better alternative to state monopoly than perfect competition.