Market Failure Due to Externalities 455In April 2000, U.S. District Court Judge Thomas Jackson ruled that
Microsoft had used anticompetitive means to maintain a monopoly for its PC
operating system and had attempted to monopolize the Web-browser market.
In a subsequent ruling, he ordered the remedy urged by Clinton’s Justice
Department—that Microsoft should be divided into two entities: an operating
systems (OS) company and a software applications company. The split would
prevent Microsoft from using its monopoly in operating systems to extend its
market power into other markets.
However, the story was far from over. In June 2001, the Appeals Court
upheld the trial court’s findings of monopolization but overruled the proposed
breakup. Ultimately, the court required representatives from Microsoft and
President Bush’s Justice Department to attempt a negotiated settlement of the
case. The result was that Microsoft agreed to (1) sell Windows under the same
terms to all PC makers, (2) allow PC makers to install non-Microsoft software
as they pleased, and (3) disclose technical information to software rivals so that
their products could run smoothly on Windows. Microsoft was not restricted
from entering new markets or from adding any features it wanted to its oper-
ating system.
The story then moved to Europe. In 2004 the European Commission
ordered Microsoft to supply information on its operating system to its software
rivals so that they could design software to run on Windows in competition
with Microsoft’s own application software. In February 2008, the commission
announced that it was fining Microsoft $1.35 billion for noncompliance with its
2004 order. To date, Microsoft has been fined over $2.5 billion by European
authorities.^5
Perhaps ironically, attention has now turned to Google, with Microsoft
being a primary accuser. Microsoft has filed a formal complaint in Europe
accusing Google of misusing its dominant position in the search engine mar-
ket to unfairly promote its own products. The Federal Trade Commission is
considering an investigation into possible anticompetitive tactics by Google.MARKET FAILURE DUE TO EXTERNALITIES
An externalityis a cost or benefit that is caused by one economic agent but
borne by another. Pollution is a cost caused by a producer but experienced by
others—for example, local residents who suffer deteriorated air quality or
immediate neighbors who must endure aircraft noise. Externalities can be neg-
ative, as in the case of pollution, or positive. For instance, the pursuit of basic
science and research (often government sponsored) generates a host of spin-
off benefits to others.(^5) For a variety of economic views, see D. S. Evans et al, Did Microsoft Harm Consumers? Two Opposing
Views(Washington, DC: AEI Press, 2000).
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