In what ways did the state both help and hinder the functioning of the market? Because grain was essential to the state, it saw a need to intervene in the process to ensure there would be no shortage in the provision of food to the metropolis of Rome and the army. It invested in infrastructure, incentive the grain trade, subsidized ships for merchants and bread for the population, granted special tax privileges through decrees and allowed the grain merchants to unite into a collegial that protected their collective interests.
With this, the state intervened with the free market forces and consequently the grain trade became a monopoly, structured to optimize the profit potential of supplying to the roman city. On the one side, these actions helped to build a strong and well-structured organization that provided the necessary supply of food that was essential to maintaining the state, and consequently, it’s power, and allowed Rome to outgrow what the local food supply would have allowed.
On the other hand, a monopoly is in essence a market failure. In contrast to a competitive market, a monopoly tends to charge a higher price and at the expense of the consumers, gains its profits from this excessive price. From the grain trade point of view, this monopoly was very desirable because it helped to enforce certain terms and conditions and ensure profitability despite a lack of information efficiency, supporting them in case of events out of their control.
However, since economic well-being is the sum of total surpluses, and “total surplus is the sum of consumer and producer surpluses”, in a monopoly, the natural equilibrium between supply and demand isn’t achieved because there is a different distribution of resources and therefore maximum economic well-being is not achieved.
When the monopoly charges a price above marginal cost, potential consumers end up not buying and this prevents “mutually beneficial trades from taking place” . This generates deadweight loss, which is the decrease in the quantity sold versus its optimal quantity level. Governments tend to address this problem in 4 ways, one of which is how the roman state addressed it: by regulating the monopoly behavior, and subsidizing.
This had 2 major outcomes: 1) the state assumed losses from the monopoly and, I assume, filled the gap via taxes on the population, and; 2) there was no incentive for the monopolist to reduce costs because for them, differently from competitive markets, reducing costs doesn’t increase profits. Therefore, this is how the state helped build larger ships, and also sink them. [ 1 ]. Principles of Economics, 6th edition, by N. G. Mania [ 2 Principles of Economics, 6th edition, by N. G. Mania Roman Empire Grain Trade By cribbage’s
