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deregulation: Definition and Much More from Answers.com

  • ️Tue Feb 02 2077

Most societies rely on competitive markets to handle the allocation of scarce resources to their highest and best uses. Yet markets are not without their shortcomings. For this reason, governments sometime institute regulatory control. In 1887, the first regulatory agency, the Interstate Commerce Commission, was created to regulate monopolistic pricing policies of railroads.

When private firms gain monopoly power, usually because of economies of scale, they are in a position to restrict production and raise price with little worry of competition; these are known as natural monopolies. The government may permit a single producer (e.g., of natural gas or electricity) to exist in order to gain lower production costs but simultaneously empower a regulatory agency to set the firm's prices.

A second reason for regulation stems from the fact that society declares certain activities illegal. Prostitution, gambling, and certain drugs are either not permitted or allowed only under certain conditions. Through a licensing system, government agencies control who enters such industries, their prices, and their methods of operation.

Another reason for government regulation arises because society establishes standards for particular professions, such as medicine, law, accounting, and real estate. The government guarantees compliance with these standards by imposing tests and other requirements. Those failing to meet these standards are not permitted to engage in that business. Hundreds of agencies administer tests and police the professions, all done ostensibly in the interest of protecting the consumer. Interestingly, license holders often push for even higher licensing requirements, often grandfathering in all current license holders, because higher salaries are possible when the number of competitors is restricted.

Many government regulations are designed to protect people from the negative consequences (i.e., externalities) of buyers and sellers who have little incentive to look out for the welfare of third parties. For example, slaughterhouses may have the freedom to kill animals for sale to their customers in grocery stores without taking into account obnoxious odors or sounds emanating from the slaughterhouse. Neighborhood residents, however, incur externality costs. Through agencies such as the Environmental Protection Agency (EPA), the government controls what slaughterhouses can and cannot do in order to lessen the negative effects on the population.

Although government regulation is pervasive for the reasons presented above, it is apparent that regulation may not achieve the lofty goals set out in the initial effort to regulate. Governments can also fail, and government failure often aggravates the problems it sets out to solve. Public choice economists have identified several specific causes of government failure. Voters are often rationally ignorant about many things, and they vote for political candidates who are uninformed or misinformed. Also, politicians are often indebted to their financial supporters, some of whom are regulated industries, and will often enact laws favorable to their supporters regardless of the negative impact on the public. Politicians may even be willing to sacrifice the future for the sake of short-term benefits for their financial supporters. Recognition of such limitations to government regulation has caused Congress to rethink regulation, especially as it relates to certain industries.

Beginning in the mid-1970s, increased dissatisfaction with the burdens of regulation, especially the costs imposed on consumers, led to the deregulation of a number of industries, including the airlines (Airline Deregulation Act of 1978), natural gas (Natural Gas Policy Act of 1978), trucking (Motor Carrier Act of 1980), and banking (Depository Institutions Deregulation and Monetary Control Act of 1980).

In 1997 some states began deregulating the production and sale of electricity. Newtechnolo gies nowpermit small companies to produce electricity at reduced costs. Under the newsystem (much like the system in the telephone industry), local utilities must permit competitors to use their electric lines for a fee.

Benefits from deregulation include reduced prices and increased choices for consumers. Competition among long-distance telephone suppliers is keen, no longer requiring government regulation, and is demonstrated by the fact that from 1985 to 1998 prices declined by 72 percent. Expanded service and reduced prices have occurred in both airlines and trucking. Eleven thousand newtrucking lines started up within three years of deregulation, and savings may be as high as $50 billion per year.

Some concerns have arisen about deregulation, however. The airline industry has become more concentrated since deregulation. In 1978 eleven carriers handled 87 percent of the traffic, while in 1995 seven carriers handled 93 percent of the traffic. Although some feared reduced safety, that has not materialized. Some of the bank failures in the 1980s were attributed to deregulation; yet depositors receive higher interest. On balance, deregulation effects have been positive.

A significant change in direction has also taken place with regard to government regulation of industries producing externalities. Many externalities arise because of the lack of property rights; consequently there is greater emphasis on establishing clearly defined property rights, which allows the market to automatically internalize the cost to buyers and sellers, making government regulation costly and unnecessary. The EPA nowdepends less heavily on its command-and-control approach and more heavily on tradable permits, reducing the overall level of pollution and allowing firms to avoid pollution in a more cost-effective way.

Although Congress has deregulated specific industries, social regulation designed to "protect" consumers has expanded. Through such agencies as the Occupational Safety and Health Administration, the Consumer Product Safety Commission, the Food and Drug Administration, the Equal Employment Opportunity Commission, and the EPA, the government is attempting to provide safer products, better health care, fairer employment practices, and a cleaner environment. Government at federal, state, and local levels has also continued to increase license requirements for numerous occupations and pro fessions.

Many economists wonder if the benefits are high enough to warrant the cost of regulation. In addition to regulatory-imposed limits on consumer freedom, product prices rise, administrative costs are high, and some firms are driven out of business, thereby reducing competition. To further complicate things, many special-interest groups use such laws to increase their wealth at the expense of others. It has been estimated that federal regulation costs each household $6000 per year. Clearly the issues surrounding regulation/deregulation will continue to be discussed into the twenty-first century.

Bibliography

Kahn, Alfred E. (1988). The Economics of Regulation: Principles and Institutions. Cambridge, MA: MIT Press.

Teske, P., Best, S, and Mintrom, M., (1995). Deregulating Freight Transportation. Lavergne, TN: AEI Press.

Winston, C. (1993). "Economic Deregulation" Journal of Economic Literature September: 1263-1289.

[Article by: JAMES R. RINEHART; JEFFREY J. POMPE]

Deregulation is the process by which governments remove, reduce, or simplify restrictions on business and individuals with the intent of encouraging the efficient operation of markets. The stated rationale for deregulation is often that fewer and simpler regulations will lead to a raised level of competitiveness, therefore higher productivity, more efficiency and lower prices overall. Deregulation is different from liberalization because a liberalized market, while often having less and simpler regulations, can also have regulations in order to increase efficiency and protect consumer's rights, one example being anti-trust legislation. However, the terms are often used interchangeably within deregulated/liberalised industries.

Deregulation gained momentum in the 1970s, influenced by research at the University of Chicago and the theories of Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, among others. Two leading ‘think tanks’ in Washington, the Brookings Institution and the American Enterprise Institute , were active in holding seminars and publishing studies advocating deregulatory initiatives throughout the 1970’s and 1980’s. Alfred E. Kahn played an unusual role in both publishing as an academic and participating in the Carter Administration’s efforts to deregulate transportatiion.

The first comprehensive proposal to ‘deregulate’ a major industry in the United States – transportation -- originated in the Richard Nixon Administration and was forwarded to Congress in late 1971. The proposal addressed both rail and truck transportation, but not air carriage. This Administration sought to cultivate support from commercial buyers of transportation services, consumer organizations, economists, and environmental organization leaders. After Nixon left office, the Gerald Ford presidency, with allied interests, secured passage of the first significant change in regulatory policy in a pro-competitive direction, in the 1976 of the Railroad Revitalization and Regulatory Reform Act of 1976, Pub. L. 94-210. President Jimmy Carter devoted substantial effort to transportation deregulation, and worked with Congressional and civil society leaders to pass the Airline Deregulation Act (24 October, 1978), Staggers Rail Act (signed 14 October, 1980), and the Motor Carrier Act of 1980 (signed 1 July 1980).

The Emergency Natural Gas Act (signed 2/2/77) was a mix of regulation in response to OPEC price hikes and deregulation. The Airline Deregulation Act is a notable example. It sought to reintroduce market forces to the heavily regulated commercial airline industry. Subsequent deregulation has had mixed results.

One problem that encouraged deregulation was the way in which the regulated industries often controlled the government regulatory agencies, using them to serve the industries' interests. Even where regulatory bodies started out functioning independently, a process known as regulatory capture often sees industry interests come to dominate those of the consumer. A similar pattern has been observed with the deregulation process, itself often controlled by the regulated industries.

Negative outcomes of deregulation (such as the failure of the Savings & Loan sector of the U.S. during the 1980s) have led to limited re-regulation, and more balanced approaches to regulation that emphasize the quality of regulation over the quantity.[citation needed] That is, instead of simply removing (or adding) regulations on business, the point is to regulate business intelligently, using as sophisticated an economic theory as possible.[citation needed]

One can distinguish between deregulation and privatization. Privatization can be seen as taking state-owned service providers into the private sector. This can result in making the privatized entrprise more subject to market forces than was the state owned entity. But the degree to which there is freedom to operate in the market -- market liberalization -- and the extent of competitiveness in the market for the goods and services of the privatized entity or entities, may depend on other measures taken in addition to privatization.

One influential measure of worldwide business regulations that has inspired mostly deregulation but also in some instances increased regulations is the Ease of Doing Business Index.

Argentina

Argentina underwent heavy economic deregulation[citation needed], privatization, and had a fixed exchange rate during the Menem administration (1989–1999). Critics argue that these policies, implemented under advice of international organizations like the IMF and the WTO, eventually produced massive de-industralization and unemployment, and became unpopular after the politico-economic collapse of 2001.[attribution needed] Others argue that high corruption flawed these policies in practice and that continued overspending by the government, while causing a temporary 'economic miracle', inevitable in the end caused a collapse.

Deregulation by area

Australia

Australia was an early leader in motor transport deregulation, lifting heavy taxes on road transport which allowed expansion of motor carriage and more rail-motor carrier competition. Australia experienced deregulation of their labour market during the late 1980s under Hawke/Keating Labor government's. Since then the country has had extensive deregulation of their labour market since 2005. This process was made under John Howard's Liberal Party of Australia

Canada

The province of Ontario attempted to in 2002 but since pulled back due to voter and consumer backlash at the resulting price chaos.[citation needed] The government is still searching for a stable working regulatory framework. See Ontario electricity policy for more.

The province of Alberta has deregulated their electricity provision. Customers are free to choose which company they sign up with.

European Union

Japan

Since the economic bubble in 1990s collapsed, the Japanese government has seen deregulation as an effective way to lift its economy because it has a huge deficit and cannot make a large tax cut.

New Zealand

New Zealand has had extensive deregulation since 1984. It was instigated by the Labour Party.

See also: Economy of New Zealand

Russia

Russia has been going through wide-ranging deregulation (and concomitant privatization) efforts since late 1990s. The main thrust of deregulation has been the electricity sector (see Unified Energy System), with railroads and communal utilities tied in the second place.[citation needed] Deregulation of natural gas sector is one of the more frequent demands placed upon Russia by the United States and European Union.

United Kingdom

The United Kingdom has developed a programme of better regulation since 1997. This has developed to include a general programme for government departments to review, simplify or abolish their existing regulations, and a "one in, one out" approach to new regulations. In 2006, new primary legislation is proposed (a Legislative and Regulatory Reform Bill) which is intended to establish statutory principles and a code of practice.

United States

Deregulation was a major trend in the United States in the last quarter of the twentieth century.[citation needed] A number of major deregulation initiatives were passed. Some of these were withdrawn quickly (but not quickly enough to avoid major problems[citation needed]), including the deregulation of savings and loans. American savings banks, which were permitted to lend unfettered, had their depositors funds insured by the federal government, creating a moral hazard. The California electricity crisis was precipitated by price manipulations by companies such as Enron after energy industry deregulation in 1996, it is noteworthy that Californian electric deregulation did not result in a free market but a rule free system with a fixed objective of generating power at a price determined by the Californian government rather than supply and demand[citation needed]. Other legislation has been considered more widely successful, including deregulation of transport, telecommunications, and the gas market. One of the most controversial[citation needed] decisions occurred in 1996, when the media market was significantly deregulated.

Related Legislation

See also

External links

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