In what will come as a surprise to some but to absolutely no one with any knowledge of either the rare earth markets or free markets, the great Chinese rare earth monopoly seems to have been broken:

China's virtual monopoly on rare earth elements used in high-technology applications has been loosened, decreasing the risk that supplies to U.S. defense contractors could be disrupted, according to the Pentagon's latest assessment of the nation's industrial base. "Global market forces are leading to positive changes in rare earth supply chains, and a sufficient supply of most of these materials likely will be available to the defense industrial base," said the Pentagon report by Elana Broitman, the Defense Department's top official on the U.S. industrial base. "Prices for most rare earth oxides and metals have declined approximately 60 percent from their peaks in the summer of 2011."

Here's the background: back 5 years ago 95% of the world's rare earth production came from China. The rest was in India and Russia or ex-Soviet states (indeed, the one I deal with was almost exclusively coming from Russia). Then China decided that they would limit exports from that nation. The declared reason was environmental: it is indeed a messy business. The general assumption was that the reason was rather different. They limited exports of the raw materials but not of anything made from them. Neodymium for example, had an export limit (and serious export taxes) slapped on it, but FeNdB magnets, made from neodymium could be exported without limits or taxes. So we all assumed that the intention was to attract the manufacturing to China and thus increase the amount of value added in that country.

So, what actually happened? Well, just what people like me, those with more than a passing acquaintance with rare earths and free markets said would happen (indeed, I said it here in Foreign Policy). Mines outside China began to open up, exploration for new mines outside China surged (at one point there were more than 400 such projects going on) and manufacturers started to consider whether they really, really, needed to use rare earths or whether something else would do. Supply went up and demand went down in other words. Thus was the Chinese monopoly broken and prices fell back.

All of which teaches us something useful about monopolies. Where a monopoly is contestable we don't in fact have to worry about it very much. China was selling us all of the rare earths we wanted, at prices we were happy to pay, for decades. So, they had a monopoly? So what? As soon as they actually tried to take advantage of that monopoly then it all fell apart for them. They actually, by attempting to restrict supply, managed to call into being their own competition.

This has applications in other ares of current concern of course. For example, the European Union claims that Google is misusing its dominance in search. But while Google certainly is dominant in search this is a contestable monopoly. As soon as Google starts to throw its weight around to the detriment of consumers then consumers will go off and use one of the myriad of alternatives. And new alternatives will arrive as well.

Where monopolies are natural ones (perhaps because of network effects) or backed by government licence or regulation the situation is different, but a contestable monopoly can almost certainly be left alone. Precisely because as soon as anyone tries to profit from the monopoly that monopoly itself will be contested.