What is 'Legal Monopoly'

A legal monopoly is a company that is operating as a monopoly under a government mandate. A legal monopoly offers a specific product or service at a regulated price and can either be independently run and government regulated, or government run and regulated.

A legal monopoly is also known as a "statutory monopoly."

BREAKING DOWN 'Legal Monopoly'

A legal monopoly is set up in the beginning as a perceived best option for both government and its citizens. For example, AT&T operated as a legal monopoly until 1982 because it was deemed vital to have cheap and reliable service for everyone. Railroads and airlines have also been operated as legal monopolies at different periods in history.

The prevailing idea behind instituting legal monopolies is that too many competitors investing in their own delivery infrastructure would mean that prices across the board would be too high. While this idea proves true, it's not true indefinitely. In most cases, capitalism has eventually wins out over legal monopolies as technology and the economy become more advanced, which levels the playing field for the industry, while slashing costs and barriers to entry. When the doors open to competition, it always proves to be in the best interest of consumers.

Examples of Legal Monopolies

Throughout history, various governments have imposed legal monopolies on a variety of commodities, including salt, iron and tobacco. The Statute of Monopolies of 1623 was an early step in an English movement to convert letters patent from a method of rewarding royal favorites at other than royal expense, to a method of encouraging inventors.

The Dutch East India Company, British East India Company and similar national trading companies were granted exclusive trade rights by their respective national governments. Private freelance traders operating outside the scope of those two companies were subject to criminal penalties, and those companies fought wars in the 17th century to delineate and defend their monopoly territories.

Legal monopolies on alcohol remain fairly common, both as a source of public revenue and as a means of control. Meanwhile, monopolies on opium and cocaine, formerly important for revenue, were converted or reinstituted during the twentieth century to curb the abuse of controlled substances. For example, Mallinckrodt Incorporated is the only legal supplier of cocaine in the United States.

The regulation of gambling in many places includes a legal monopoly with national or state lotteries. Where private operation is allowed, for example in horse racing, off-track betting and casinos, the authorities may license only one operator.

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