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a Regression Discontinuity Approach

Modern monopolies are a bit less transparent, for two reasons. First, even though governments still grant monopolies, they usually grant them to the producers. Second, some monopolies just happen without government creating them, although these are usually short-lived. Either way, the proceeds of the monopoly markup (or tax) are commingled with the return to capital of the monopoly firms. Similarly, labor monopoly is usually exercised by unions, which are able to charge a monopoly markup (or tax), which then becomes commingled with the wages of their members. The true effect of labor monopoly on the competitive wage is seen by looking at the nonunion segment of the economy. Here, wages end up lower because the union wage causes fewer workers to be hired in the unionized firms, leaving a larger labor supply (and a consequent lower wage) in the nonunion segment.

A final example of what occurs with official prices that are too high is the phenomenon of “rent seeking,” which occurs when someone enters a business to earn a profit that the government has tried to make unusually high. A simple example is a city that imposes a high official meter rate for taxis but allows free entry into the taxi business. The fare must cover the cost of paying a driver plus a market rate of return on the capital costs involved. Labor and capital will flow into the cab industry until each ends up getting its expected, normal return instead of the high returns one would expect with high fares. What will adjust is simply the number of cabs and the fraction of the time they actually carry passengers. Cabs will get more for each rider, but each cab will have fewer riders.