The conservativeness of Harberger’s welfare loss estimation
In his work “Monopoly and Resource Allocation” (1954), Arnold Harberger evaluates
empirically the welfare loss that is brought by the monopolies in the US in the early 20th century. His
work is a response to the antitrust campaigns that were fighting against the monopolies without
having any actual numbers to prove what American community loses from the monopolies existence.
In his paper, he makes three main assumptions: that marginal and average costs are equal, price
elasticity of demand for manufacturing goods is unit elastic, and that the long-run average costs are
10.4% (for which he relied on professor Ralph Epstein’s study “Industrial Profits in the United
States”). I will elaborate more on these assumptions in my main arguments. Using the 10.4% as the
average rate of return, he evaluated how industries’ profits deviate from that figure. This was also an
estimation of the welfare loss. As a result, Harberger concluded that the welfare loss due monopolies
is less than $1.50 per capita at 1953 prices, and its effect on welfare is insignificant: “Our economy
emphatically does not seem to be a monopoly capitalism in big red letters” (Harberger, 1954).
Harberger’s theory is still relevant in modern economics. It helps to understand to what extent
monopolies are “harmful” to social welfare and whether the misallocation of resources due to their
existence is critical.
In his work “Monopoly and Resource Allocation” (1954), Arnold Harberger evaluates
empirically the welfare loss that is brought by the monopolies in the US in the early 20th century. His
work is a response to the antitrust campaigns that were fighting against the monopolies without
having any actual numbers to prove what American community loses from the monopolies existence.
In his paper, he makes three main assumptions: that marginal and average costs are equal, price
elasticity of demand for manufacturing goods is unit elastic, and that the long-run average costs are
10.4% (for which he relied on professor Ralph Epstein’s study “Industrial Profits in the United
States”). I will elaborate more on these assumptions in my main arguments. Using the 10.4% as the
average rate of return, he evaluated how industries’ profits deviate from that figure. This was also an
estimation of the welfare loss. As a result, Harberger concluded that the welfare loss due monopolies
is less than $1.50 per capita at 1953 prices, and its effect on welfare is insignificant: “Our economy
emphatically does not seem to be a monopoly capitalism in big red letters” (Harberger, 1954).
Harberger’s theory is still relevant in modern economics. It helps to understand to what extent
monopolies are “harmful” to social welfare and whether the misallocation of resources due to their
existence is critical.
