Government-erected barriers mean firms have few incentives to improve efficiency, cut costs and satisfy consumers

Vincent GelosoEconomists love competition.

They tell students how competition between firms leads to lower prices and greater quality. Beyond the classroom, few dispute the benefits of competition.

So why are so many Canadians unaware that governments across Canada shield close to one-third of the economy from competition?

When economists speak of competition, they don’t refer only to the number of firms within a given market. Rather, they refer more narrowly to the threat of competition, which keeps incumbent firms on their feet.

A firm may, through technological innovation that reduces costs, conquer large market shares so it virtually dominates its market or ends up being the only firm in that market. Yet even then, it may act in a competitive way as long as other firms are free to enter the market if the top firm starts abusing its dominant position by raising prices or lowering quality.

More importantly, the threat of entry can come from unexpected corners through technological innovation that simply renders obsolete the good that an established firm produces. That threat of entry is a major force for delivering goods and services of greater quality at lower prices.

When there are barriers to entry, the threat is lower and incumbent firms have few incentives to reduce prices and improve quality. Some of the barriers to entry are inherent in the features of the goods produced.

However, a great many more barriers are the result of government actions. Governments across Canada have been quite adept at erecting such barriers.

For example, foreign investment in telecommunications and broadcasting is restricted so non-Canadian firms can’t enter the cellphone and television services markets. The same applies to air transportation – non-Canadian carriers are prohibited from carrying passengers between Canadian cities. Governments also operate monopoly services that explicitly prohibit competition in sectors such as electricity generation and distribution, alcohol retail, urban transit and domestic mail (for small letters).

Most provincial governments in Canada (including Quebec and Ontario) also give monopoly licences to intercity bus providers on certain routes. Consumers are hostages to the whims of the only company allowed to provide services. Given that users of intercity buses are disproportionately from the poorest groups of Canadian society, limiting competition here seems particularly regressive.

Measuring these barriers is difficult. However, a study recently published by the Fraser Institute suggests that 22.1 per cent of the Canadian economy is shielded from competition. Add in other barriers, such as those on interprovincial trade and occupational licensing, and we arrive at a figure of 35.1 per cent.

So between a fourth and a third of the Canadian economy is shielded from competition. According to international surveys, such as those produced by the Organization for Economic Co-operation and Development (OECD), Canada is one of the most active countries in terms of restricting competition.

These barriers lower the living standards of Canadians because protected firms have few incentives to improve efficiency, cut costs and satisfy consumers.

If governments across the country really care about improving the living standards of Canadians, they should look at ways to undo the harm caused by the barriers they’ve erected to competition.

Vincent Geloso is a senior fellow at the Fraser Institute.


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