Academic journal article Independent Review

Of Stranded Costs and Stranded Hopes

Academic journal article Independent Review

Of Stranded Costs and Stranded Hopes

Article excerpt

The Difficulties of Deregulation

Given the manifest inefficiency of government regulation, why is there so little deregulation? Of course, some deregulation, including the privatization of state-owned industries, has occurred in recent decades. The United States experienced a spate of high-profile deregulations from 1978 to 1980 in the natural gas, trucking, and airline industries (Crandall and Ellig 1997). In Europe, deregulation has occurred concurrently with, and often as part of, the privatization of numerous sectors of the economy.

But the observation that deregulation has occurred in some markets in some places naturally raises the question, Why has it not occurred in all markets, everywhere? In America, deregulatory passions have cooled, leaving the vast bulk of regulated industries untouched. If one added the failures to privatize industries such as the postal service and east-coast railroad service, plus the current to-and-fro over deregulating electricity supply in different states, the list of missed opportunities for deregulation would be even longer. Even that staunch free-marketer, Ronald Reagan, achieved little in the way of deregulation. And in some areas where government control of the economy fell during the 1980s (notably in telecommunications) the reductions have proven to be only temporary respites or are constantly threatened. Much telephone deregulation in particular has turned into reregulation.(1) The Contract with America announced by the Republicans in 1994 to reduce government regulation is now just a rueful memory.

Why is deregulation so hard to achieve? I shall suggest several reasons. Perhaps the most interesting ones pertain to the potential gains from deregulation, which, I maintain, are often smaller than they are believed to be. In short, deregulation may not be worth the candle.

Two preliminary points merit emphasis. First, the analysis here is positive. It attempts to explain as a purely descriptive matter why there is often little pressure for deregulation. No broad normative conclusion is advanced (or warranted) that deregulation is not a good thing or that it should never be attempted.

Second, no one positive explanation for the frequent lack of enthusiasm for deregulation suffices. One grand theory of deregulation would be more satisfying intellectually, but a single model cannot explain the difficulty of reversing regulation. This condition should hardly be surprising. After all, there is no unitary model of regulation, either, despite certain economists' habit of speaking of "the economic theory of regulation." Rather, economists have gone from a relatively simple model, which explained some regulation well and other regulation not at all, to a plethora of models developed in more ad hoc fashion to explain practically all forms of regulation (Aranson 1990). Greater coverage has been achieved at the cost of universality. So it is in explaining deregulation, or the lack thereof.

Regulation, Transaction Costs, and Deregulation

The Nature of the Problem

The issue of deregulation arises only when regulation has already occurred. Social scientists have extensively analyzed how and why regulation occurs (Aranson 1990; McChesney 1998).

In the simplest model, depicted in figure 1, producers seek regulation in order to raise prices from the competitive level [P.sub.c] to some regulated level [P.sb.r]. The higher price reduces the amount of the product purchased from [Q.sub.c], to [Q.sub.r]. Consumers lose in two ways. Area I (the "Tullock rectangle") represents the monetary transfer from buyers to sellers caused by the higher price.(2) Area II (the "Harberger triangle") is the deadweight consumer-welfare loss that results because marginal consumers forgo purchasing the product even though the price they are willing to pay exceeds the marginal cost (MC) of producing the product (Harberger 1954).

[Figure 1 ILLUSTRATION OMITTED]

Thus, regulation causes losses to consumers (areas I + II) that exceed the gains to producers (area I only). …

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