Efficient Mercantilism? – Revenue-Maximizing Monopolization Policies as Ramsey Taxation
May 30, 2008
Roger D. Congleton and Sanghack Lee1
The economics literature on mercantilism tends to emphasize gold hoarding and external barriers to trade as defining characteristics. Medieval institutions, however, included a host of internal barriers to trade as well as external ones. Moreover, monopoly privileges and high offices were often for sale. In this paper, we analyze how a stable unitary government’s regulatory policies may be affected by revenues and other services generated by the efforts of rent seekers. Competition for monopoly privilege can be a significant source of government revenue that augments tax revenues, especially in settings in which collecting “ordinary” tax revenues is problematic. Our analysis provides a possible political-economy explanation for relatively successful authoritarian states that have relatively little corruption, but many internal and external
barriers to trade. A revenue-maximizing government encourages greater monopolization than is compatible with economic efficiency, but sells monopoly privileges in a manner that promotes innovation and partially accounts for the deadweight losses associated with monopolized markets.