The Harberger Model: Monopoly Power and Resource Misallocation

This essay explores the Harberger model and its application to understanding the misallocation of resources, particularly in the context of monopolies. It discusses the model's assumptions, including constant returns to scale and the impact of government intervention through taxation. The essay highlights Harberger's focus on the effects of monopoly power on market equilibrium and the resulting deadweight loss, emphasizing how monopolies can distort resource allocation for their benefit at the expense of consumers. The analysis also touches upon the role of antitrust policies and the importance of efficient resource distribution to minimize deadweight loss and promote economic equilibrium. Ultimately, the essay argues that appropriate resource allocation is crucial for sectors to operate optimally and generate decent profit rates within the economy, referencing Harberger's views on antitrust policies and their impact on monopoly capitalism.

1
Monopoly and Resource Allocation
Name of the student:
Name of the university:

2
Introduction
According to Bouakez and Kano (2008), the Harberger model defines the mechanism on the
misallocation of resources and its effects on the market. The theory is also introspected in terms
of the taxation laws that are the corporate tax and the non-corporate taxes. One can use the
Harberger model in order to gauge the deadweight loss that takes place within the market.
Moreover, the model also specifies about the excess burden experienced by the market. As
opined by Chetty(2009), deadweight loss can be defines as the cost to the society that is caused
by the inefficient approach of the market for resource allocation. If the resources are abnormally
distributed in the market then it is obvious that the market will experience deadweight loss. The
following paper will demonstrate the effort made by Harberger in comparing the loss that take
place in the market place due to inappropriate distribution of resources. Moreover, the major
reason for deadweight loss is price control in the market by the government. The government
does not allow the free market to work in its own way and hence disturbs the invisible hand,
which further distorts the profit margin.
The deadweight loss helps the society to gauge the excess burden experienced by it. Moreover,
the concept of deadweight loss includes two major ideas they are consumer surplus and the
producer surplus. The consumer surplus is the benefits received by the consumers, which is
measured by the willingness of the customer to pay for the goods and services and the actual
amount he pays in the market. If the actual amount paid by the consumer is less than the desired
amount then the consumers experience surplus in the market transaction. On the other hand, the
producer surplus is measured by the difference between the desired quantities the producer wants
to supply against a desired amount of price. If the price received by the producer is greater than
the expectation corresponding to the supplied goods and services then the producer gains a
surplus in the market. Whenever, the resources are inappropriately allocated within the economy,
there occurs a welfare loss, which does not add on to the either consumer or producer surplus.
Therefore, Harberger carried on with his researches on gauging the deadweight loss experienced
by the US economy before the recession due to misallocation of the resources. In this process the
economist have made few assumptions based on which the theory is built for gauging the
deadweight loss.

3
Assumptions and Explanation of Harberger Model
Harberger has specified two sectors in his model for instance X and Y. The major focus of the
model was to examine the effects of government intervention in the market phenomenon in the
form of tax levied. The economist was interested on two major aspects one is the effects on the
return on capital relative to the labor and second is on the party who actually bears the burden of
the taxes. According to his specification of the model, Harberger was of the opinion that a tax
incident in the economy not only reduces the return of one sector but also other sector related to
it. Further, the model of Harberger follows constant returns to scale while considering the two
sectors in the economy. Moreover, the factors of production are used in constant rate in both the
sectors. Further, Harberger has tried to follow the levy of tax on only one factor, which is also
known as the partial factor tax. The model has also made use of the general equilibrium theory
that all the sectors will move towards the equilibrium and it will gradually make every member
well off due to the equilibrium approach (Ballard, 2009). Moreover, the most important aspect
that was to be examined by the economist was the influence of the monopoly power into the
market. Harberger wanted to redefine the fact that monopolies in the market distorts the
equilibrium and increases the burden of the society. As the monopolist charges greater amount of
money for certain goods or services the monopolists gain more surpluses at the expense of the
consumers. On the other hand, the consumers in the markets re exploited by the monopolists. In
this case, the government tries to intervene into the market by levying taxes on the monopolists,
which also demoralizes the monopolist operating in the market. In such circumstances, the
monopolists back away from producing greater amount of goods or services as they are of the
notion that the government will take away the majority of the profit percentage in the forms of
taxes. Therefore, Harberger was of the view that every sector of the society must share the
burden of the government intervention and pay the taxes of in equal amount or proportional to
their income, which will eventually lead the market into equilibrium stating the assumption of
general equilibrium correct (Harberger, 2008). It has been observed that the monopolist or the
large-scale production firms uses few resources and provide greater results. On the other hand,
the small-scale firms often use greater amount of resources in order to make greater productivity
but the results are often reverse in nature. The idea behind this phenomenon identified by
Harberger is that use of few resources to its fullest potential is always helpful and rewarding for
the sectors compared to inefficient uses of greater number of resources. Therefore, in order to

4
make tax distribution equitable so that no deadweight loss takes place it is important to distribute
the resources efficiently according to the needs of the sectors. Further, speaking of the
deadweight loss, this particular measure is calculated by using a diagram, which represents a
triangle shape often referred to as the Harberger triangle. The economist also makes use of the
triangle in order to gauge the societal loss due to misallocation of the resources and higher
amount of tax payments.
Monopoly Capitalism and Harberger Model
According to Foster (2014), the monopoly capitalism is the phenomena under which few people
in the market control trade at their own discretion. It is stated in the Harberger model that there is
a loophole in the monopolistic approach concerning the resource allocation within the market. It
is a fact that the monopolies in the market allocate resources according to their needs in order to
gain greater profits. It might occur that the monopolies might allocate scare resources in their
lean season and more resources in the peak season, which would affect their profit rate. But
Harberger was of the opinion that monopolies alone do not affect the average prices because
there is only 10 percent monopoly operating in every market, which alone cannot put pressure on
the average prices of the economy. The economist was of the view that the government should
intervene in the market for allocating the resources appropriately.
Conclusion
If the resources are allocated appropriately it will help the sectors to operate in an optimum
condition thereby generating decent profit rate within the economy. Harberger also considered
the antitrust policies in his model, which came up with the monopoly concepts. However, the
economist could not anticipate the significance of the antitrust policies in order to mitigate the
problem of monopoly capitalism. He was of the view that the government initiated the antitrust
policies form king the monopoly capitalism a better option operating in the market. The
government was restoring the faith upon the monopolists.

5
Reference List
Ballard, C.L., Fullerton, D., Shoven, J.B. and Whalley, J., 2009. A General Equilibrium Model
for Tax Policy Evaluation. 8th ed. Chicago: University of Chicago Press.
Bouakez, H. and Kano, T., 2008. Terms of trade and current account fluctuations: the Harberger–
Laursen–Metzler effect revisited. Journal of Macroeconomics. 30(1), pp.260-281.
Chetty, R., 2009. Is the taxable income elasticity sufficient to calculate deadweight loss? The
implications of evasion and avoidance. American Economic Journal: Economic Policy. 1(2),
pp.31-52.
Foster, J.B., 2014. The theory of monopoly capitalism. 4th ed. New York: NYU Press.
Harberger, A.C., 2008. The incidence of the corporation income tax revisited. National Tax
Journal. 61(2), pp.303-312.