11-Regulation and Deregulation

  1. Some industries are not good for deregulation, either by running each other into a ground with prices or requiring huge networks that would be wasteful to have more than a certain number to have
    1. 19th century railroads
      1. Expensive startup costs with the laying of the track and buying of the engines
      2. High fixed costs
      3. Competing companies drove down the rates so much that no one made a profit and most ended up bankrupt
      4. Corruption, though, did happen regularly when the Gov’t started to subsidize the industry
    2. Public utilities
      1. Imagine competing water companies, how many networks of pipes would be underground
      2. One way to deal with this would be to have firms compete for the generation of water or electricity and leave distribution to one entity
    3. The common denominators are
      1. Huge networks
      2. High fixed costs and
      3. High startup costs
  2. Option for regulation
    1. Break-up monopolies into smaller companies, but this may lead to higher costs
    2. Cost-plus regulation
      1. Gov’t sets prices at a price equal to cost plus a modest profit(susceptible to corruption)
      2. It also stunts innovation, as you wont be able to make higher profits despite
      3. May end up having more waste due to prices automatically including costs. There would be no incentive to curb expenses
    3. Price-Cap regulation
      1. Regulator sets price
      2. The lower a firm could reduce costs/expenses the more they could make
      3. Prices are set a few years out sometimes for lower the current if they feel prices should go down
    4. With any type of regulation the human element can take effect(Regulatory Capture)
      1. Regulators may feel its their job to protect profits and workers rather than competition and consumers
      2. Regulators get pampered by business owners not consumers. Once the owner and regulator become “friends” it may be hard to impose policies not in their favor
  3. Deregulation in the late 70’s-80’s
    1. Included airlines, banking, trucking, oil, intercity bus travel, phone equipment and long distance and railroads
      1. Consumers benefited from lower prices and new goods and services
        1. Airlines now had more hubs which meant their were more connecting flights instead of direct flight only
        2. Banking saw the inception of the atm
        3. Telecommunications effects are almost self explanatory going from a home phone to where we are now
      2. These things never happened because there was no incentive to innovate
        1. Competition became fierce as monopolies were broken up
          1. Less flight were empty which brought total costs down
          2. Trucks had fewer empty miles and shipping costs fell
          3. RxR’s closed underperforming lines
        2. Why would AT&T innovate when they had a legal monopoly(they had one type of phone for decades)
    2. Deregulation cost many people jobs
      1. There were fixed prices Gov’t setting prices that covered costs
      2. The jobs lost most were cushy do-nothing jobs
      3. It was almost like redistribution from the poor and middle class to the wealthy
  4. Partial regulation or carving off companies or industries
    1. AT&T never had much innovation and in time was carved off into several smaller companies
      1. Several local companies emerged(different Bell companies e.g. Cincinnati Bell)
      2. Also made them carve into a separate equipment firm and long-distance firm
    2. Garbage, a hypothetical situation would be to section off the city, take bids for certain areas and evaluate and rebid if necessary
    3. Electricity
      1. Most arguments don’t focus on the production , the grid would remain publically owned but generation would be open to competition
      2. Has worked in places like the uk and Pennsylvania but has been a disaster in CA
    4. Broadband internet has some of the making of a natural monopoly with the need for a network and high fixed costs
      1. Some say it should be regulated like electricity with one provider per city
      2. While others would say its growing and changing too much and who would decide which technology to accept and once we agreed upon a technology this action would stunt future growth
      3. With electricity there are not many creative ways to distribute which makes it better suited for this type of regulation where there are a few distinct ways to distribute high-speed internet including wirelessly
  5. Gov’t serves as a referee to the free market
    1. Just because something is deregulated doesn’t mean that safety security, etc are not still regulated
    2. If you want all people o have broadband the worse you can do is have one company give it away
      1. Either subsidize the industry or,
      2. Send those that cant afford it checks for it
    3. Lastly the worst possible scenario is to label all firms in an industry the problem, instead, find the acute problem and fix it.



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