Regarding monopolies, and under the thesis of Adam Smith. a) Monopolies are good for promoting specialization or division of labor; b) Monopolies promote a democratic government and electoral participation; c) Monopolies are always seen on the negative side because they do not support competition, low prices, and prosperity; d) Monopolies are always contrary to the best allocation of resources and the State should avoid them. e) all
The correct answer and explanation is:
Correct Answer: c) Monopolies are always seen on the negative side because they do not support competition, low prices, and prosperity.
Explanation:
Adam Smith, often referred to as the father of modern economics, discussed monopolies in his seminal work “The Wealth of Nations” (1776). According to Smith, monopolies are harmful to economic prosperity and the welfare of consumers. He believed that monopolies distort the natural functioning of markets, which should ideally be guided by competition and the “invisible hand” of supply and demand.
Smith argued that monopolies:
- Restrict competition, which is essential for innovation, efficiency, and consumer choice.
- Lead to higher prices, since monopolists face no competitive pressure to keep prices low.
- Create inefficiencies because monopolies do not need to improve productivity or reduce costs.
- Stifle economic liberty, as they allow a single firm or group to dominate a sector, limiting opportunities for others.
Smith wrote:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
This reflects his suspicion of monopolistic practices and his belief that they are inherently anti-competitive and detrimental to the broader economy.
Let’s examine why the other options are incorrect:
- a) While specialization and division of labor are key concepts in Smith’s theory, monopolies do not necessarily promote them; in fact, lack of competition can reduce the incentive to specialize.
- b) There is no direct link between monopolies and the promotion of democracy or electoral participation in Smith’s work.
- d) While Smith criticizes monopolies, his solution was more market-based than calling for constant state intervention.
- e) is incorrect because only option c correctly captures Adam Smith’s stance.
Thus, option c best aligns with Smith’s thesis on monopolies.