In our last post, we explored how government spending creates unavoidable trade-offs by redirecting resources from private uses to public ones. Today, let’s examine a specific type of market distortion that makes these trade-offs even more problematic: monopsony.

Most people are familiar with monopolies—situations where there’s only one seller of a particular product or service and multiple buyers. But the flip side, monopsony, gets much less attention despite being equally important. A monopsony exists when there’s essentially only one buyer for a particular good or service.

In truly free markets, monopsonies are almost impossible to maintain naturally. Imagine if there were only one buyer for personal computers, or food, or automobiles. The basic economics strain credibility. Not only would it require impossibly concentrated wealth, but it would also mean nobody else wanted those products for themselves.

Even when a natural monopsony might theoretically emerge—say, the first person to buy the first iPhone—it disappears the moment a second buyer enters the market. Competition among buyers, just like competition among sellers, is what keeps markets healthy and prices reasonable.

But governments create a different situation entirely. They can and do function as monopsony buyers for entire industries, and this creates profound economic distortions that ripple throughout the entire economy.

The clearest example is military hardware. You, as a private citizen, cannot legally purchase cruise missiles, fighter jets, or aircraft carriers. But governments routinely buy these items, supporting entire industries built around serving this single type of customer.

This isn’t necessarily a criticism of military spending itself. National defense serves important purposes that private markets don’t usually address. But we need to understand the economic consequences of how we choose to organize these activities.

When the government functions as a monopsony buyer, it fundamentally changes how resources get allocated. Brilliant engineers who might otherwise develop more efficient cars or revolutionary medical devices instead design weapons systems. Advanced materials that could improve consumer electronics get devoted to military applications. Manufacturing capacity that could produce goods for everyday consumers instead produces items only the government can buy.

The numbers are staggering. The proposed U.S. military budget for fiscal year 2026 is just over $1 trillion—roughly $7,650 per American household. That represents an enormous redirection of resources from private uses to government ones.

But the distortion goes beyond just the money. When government is the only buyer, normal market mechanisms break down. In competitive markets, buyers shop around, compare prices, and demand value for their money. Companies compete for customers by offering better products at lower prices.

When there’s only one buyer, however, the dynamic changes completely. Suppliers don’t need to worry about losing customers to competitors—there are no other customers. Instead, they focus on maintaining political relationships, navigating bureaucratic requirements, and meeting government specifications that may have little connection to economic efficiency.

This creates what economists call “rent-seeking” behavior. Instead of competing to create value for consumers, companies compete to influence government procurement decisions. They hire former government officials, locate facilities in politically important districts, and structure their operations around bureaucratic requirements rather than streamlined supply chains.

The result is higher costs and less innovation than we’d see in competitive markets. Military contractors regularly deliver projects years behind schedule and billions over budget precisely because they don’t face the competitive pressures that discipline private companies.

Consider the F-35 fighter jet program, which has cost taxpayers over $400 billion and counting—making it the most expensive weapons system in history. In a competitive market, customers would have walked away from such cost overruns long ago. But when you’re the only buyer and the supplier knows it, normal market discipline disappears.

This doesn’t just affect military spending. Government creates monopsony conditions in healthcare through programs like Medicare and Medicaid, in education through public school systems, and in infrastructure through its role as the primary buyer of roads, bridges, and public buildings.

Each of these represents a conscious choice to remove certain economic activities from competitive markets and place them under centralized control. Sometimes this might be a good idea (or, at least, not a bad one). But we should be honest about the economic costs.

When government acts as a monopsony buyer, it diverts not just money but talent, materials, and innovation capacity away from serving individual consumers toward serving political priorities. The brilliant minds designing the next generation of military aircraft aren’t designing better cars or developing new medical technologies.

The advanced materials going into defense contracts aren’t making smartphones more durable or appliances more efficient. The manufacturing capacity dedicated to government contracts isn’t producing goods that ordinary people can buy to improve their daily lives.

This brings us back to the fundamental insight about trade-offs. Every resource has alternative uses, and when government claims those resources for its own purposes, private individuals lose access to whatever those resources might have produced instead.

We can’t directly measure what we’re missing because it never gets made. But we can look at the opportunity costs. That $7,650 per household in military spending represents $7,650 that families can’t spend on their own priorities—whether that’s better healthcare, education, housing, or simply more money in their savings accounts.

None of this suggests that government should never be a buyer in any market. Some functions, like national defense, may genuinely require centralized coordination that markets might struggle to provide. But we should recognize that when government becomes the dominant or only buyer in any sector, we lose the benefits that competitive markets normally provide: efficient pricing, rapid innovation, and responsiveness to actual human needs rather than political priorities.

The monopsony problem illustrates something we’ve emphasized throughout this series: the importance of understanding what capitalism actually is and how it works. When critics point to expensive, inefficient government programs as evidence that “capitalism doesn’t work,” they’re often pointing to sectors where capitalism has been explicitly prevented from working through government monopsony power.

Real capitalism requires competitive markets with multiple buyers and sellers, all free to choose their trading partners. When government eliminates that choice by becoming the only buyer, we shouldn’t be surprised that we get the inefficiencies and distortions that monopsony power inevitably creates.

Learn more about capitalism here.