Regulations & Deregulation

What is Social Regulation?

Regulation consists of rules identifying permissible and impermissible activity on the part of individuals, firms, or government agencies.

Social Regulations are aimed at restricting behaviors that directly threaten public health, safety welfare or well being.

What is Economic Regulation?

The prescribing of prices and output levels for entire industries. Natural Monopolies

Railways Telecommunications Utilities Mail Delivery

The Fair Rate of Return

Regulation is used to make price and supply much like what a perfectly competitive industry would provide.

– At Pm too little output and too much profit for a firm is yielded.

– At Pr the company produces Qr but is subject to make a loss because the demand lies below the average total cost.

– Regulation provides a cost of Pf which is set at a zero economic profit, where demand and average total cost intersect.

LEGEND ATC = Long-run average total cost D = Demand MC = Long-run marginal cost MR = Marginal revenue

Problems with Regulation

Price is set at a percentage of average cost.

Creates Negative Incentives

Increase costs

Run inefficiently

Acquire excess capacity

Money is wasted in order to increase rates to increase profits.

What is Deregulation?

The government removes, reduces, or simplifies restrictions on businesses.

Simpler regulations lead to more competition, which increases productivity.

Airline Deregulation Act of 1978

The main purpose of the act was to remove government control from commercial aviation and expose the passenger airline industry to market forces.

Benefits of Deregulation

The airline industry expanded and they were able to attract travelers with discounts, more flights, and lower rates.

Trucking companies were able to set their own rates, routes, and carry more freight.

Effects of Deregulated Industries

Many airlines and trucking firms became bankrupt due to the increased competition.

Airlines Affected by the Deregulation Act of 1978

Eastern Airlines Pan Am TWA Continental

Privatization

Occurs when a government-run business is transferred to a privately owned business.

Many private firms are providing garbage services, water services, and road building maintenance. These are contracted out (privatized) by the city or state.

Regulation and Deregulationin other countries

Nationalization

Definition: Government takes over and operates an industry.

It was preferred rather than regulation as a solution to natural monopoly in many regions in the world.

Issue: Compensation from the government to the private

company being bought out.

Privatization

Definition: transfer of ownership from the public sector to the private sector.

Three types:1. Wholesale privatization – entire publicly owned firm

is transferred to private ownership.2. Contracting out – specific aspect of a government

operation is carried out by private firm.3. Auctioning – the rights to operate a government

enterprise go to the highest private-sector bidder

Since 1980, more than 80 countries have launched efforts to privatize their state-owned-enterprises (SOE).

since 1980, more than 7000 SOEs have been privatized worldwide.

Privatization (cont.)

Privatization (cont.)

Issue: Pro-privatization believes that private markets

actors can be more efficient due to free market competition.

Anti-privatization argue that that governments ensure the efficiency of their enterprises in order to gain potential voters.