3. Legal barriers to entry.

Legal barriers: legal franchise, license, patent or copyrights granted by government that prohibits other firms or individuals from producing particular products or entering particular occupations or industries.

The whole idea is for the government to allow just one firm or a group of individuals to do business.

First, it may be necessary to obtain a public franchise to operate in an industry. As we noted in the Focus essay, the monarch granted a franchise determining who could sell Asian goods in England in the seventeenth and eighteenth centuries. In modern times, franchises are granted by government for a variety of undertakings.

Example: The U.S. Postal Service has an exclusive franchise to deliver first-class mail. Many universities offer exclusive franchises to firms that provide food service on campus. Similar arrangements for food and gas service are made along toll roads such as the New Jersey Turnpike. The essence of an exclusive public franchise is that a monopoly is created; competitors are legally prohibited from entering franchised markets.

Public franchise: A right granted to a firm or industry allowing it to provide a good or service and excluding competitors from providing that good or service.

Second, in many industries and occupations a government license is required to operate.

Example: In most states a license is required to enter occupations such as architecture, dentistry, embalming, law, professional nursing, pharmacy, school teaching, medical practice, and veterinary practice. At the federal level, an operating license is required from the Federal Communications Commission to open a radio or television station. If you want to operate a trucking firm that carries goods across state lines, you must obtain a license from the Interstate Commerce Commission. Licensing therefore creates a type of monopoly right by restricting the ability of firms to enter certain industries and occupations.

Government license: A right granted by state or federal government to enter certain occupations or industries.

The patent prohibits others from producing the patented product and thereby confers a limited-term monopoly on the inventor. The purpose of a patent is to encourage innovation by allowing inventors to reap the exclusive fruits of their inventions for a period of time. Yet a patent also establishes a legal monopoly right. In effect, the social benefit of innovation is traded off against the possible social costs of monopoly.

Some barriers to entry are the result of government policies that grant single-seller status to firms.

Patents and copyrights are another government-supported barrier to entry.

A patent is a legal protection of a technical innovation that gives the person holding the patent a monopoly on using that innovation.

They give creators of new products and works of literature, art, and music exclusive rights to sell or license the use of their inventions and creations. Patents and copyrights provide monopoly protection for only a specified number of years. After the patent expires, the barrier to entry is removed.

The idea behind patents and copyrights is to encourage firms and individuals to innovate and produce new products by guaranteeing exclusive rights to the profits through monopoly supply for limited periods.