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Chapter 11: Problem 24

What is deregulation? Name some industries that have been deregulated in the United States.

Short Answer

Expert verified
Deregulation is the process of removing or reducing government regulations and restrictions on a specific industry or market to promote competition, increase market efficiency, and benefit consumers. Examples of industries deregulated in the United States include the airline industry (Airline Deregulation Act of 1978), telecommunications industry (Telecommunications Act of 1996), energy industry (through actions by the Federal Energy Regulatory Commission since the 1980s), the banking industry (Gramm-Leach-Bliley Act of 1999), and the transportation industry (Motor Carrier Act of 1980 and Staggers Rail Act of 1980).

Step by step solution

01

Define Deregulation

Deregulation is the lifting or elimination of government regulations and restrictions on a specific industry or market, with the aim of promoting competition, increasing market efficiency, and benefiting consumers.
02

Examples of Industries That Have Been Deregulated in the United States

The following are some examples of industries that have experienced deregulation in the United States: 1. Airline Industry: The Airline Deregulation Act of 1978 eliminated government control over fares, routes, and market entry for new airlines. This led to more competition, lower airfares, and an increase in the number of flights and routes available. 2. Telecommunications Industry: The Telecommunications Act of 1996 was a major overhaul of US telecommunications law that aimed to increase competition in the industry, particularly for local phone service. It eliminated many barriers to entry and allowed for greater competition between telephone, cable, and internet service providers. 3. Energy Industry: The Federal Energy Regulatory Commission (FERC) has been gradually deregulating the electricity and natural gas industries since the 1980s. This has led to open-access transmission systems and the creation of competitive wholesale electricity markets. 4. Banking Industry: The Gramm-Leach-Bliley Act of 1999 repealed parts of the Glass-Steagall Act of 1933, which separated commercial banks from investment banks and insurance companies. This deregulation allowed for increased competition between financial institutions and the creation of financial conglomerates. 5. Transportation Industry: The Motor Carrier Act of 1980 deregulated trucking and bus industries, allowing for more competition and innovation in the sector. The Staggers Rail Act of 1980 deregulated various aspects of the railroad industry, including rate-setting and route-planning, which allowed for greater operational flexibility for railroads.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Competition in Deregulated Markets
When industries undergo deregulation, competitiveness within the market typically increases. This is because fewer regulations allow for more players to enter the market.
This influx can lead to various outcomes:
  • Increased choice for consumers, as new businesses offer different services or products.
  • Potentially lower prices, due to more companies competing to attract customers.
  • Enhanced innovation, as companies strive to outperform others by improving their offerings.
Deregulation encourages a dynamic environment where companies can freely adjust prices and production methods. This can result in more efficient and customer-oriented industries.
Market Efficiency and Deregulation
Market efficiency refers to how well market prices reflect all available information. In an efficient market, goods and services are produced and distributed at the lowest cost and best benefit to consumers.
Deregulation plays a crucial role in enhancing market efficiency by:
  • Reducing operational bottlenecks. Less bureaucracy means faster decisions and adaptations.
  • Allowing prices to adjust based on supply and demand without artificial constraints.
  • Encouraging businesses to find cost-effective strategies, as competitive pressure mounts.
While deregulation does promote efficiency, it relies on several conditions, such as proper oversight to prevent monopolies, to be fully effective.
The Airline Deregulation Act of 1978
The Airline Deregulation Act of 1978 was a significant milestone in the U.S. aviation sector.
Prior to this act, the government controlled many aspects of airline operations, including routes and prices.
With deregulation, these controls were stripped away, leading to:
  • A drop in ticket prices due to intense competition among airlines.
  • An expansion in available routes, providing travelers with more options.
  • A surge in new airlines entering the market, increasing competition further.
However, it also resulted in some challenges, such as overcapacity and financial instability for weaker airlines, necessitating a careful balancing act between competition and stability.
The Telecommunications Act of 1996
The Telecommunications Act of 1996 marked another leap toward deregulation. This law was designed to overhaul the telecommunications industry by promoting competition and reducing entry barriers.
Key impacts of this act include:
  • Opened up local telephone markets to new providers, leading to more choices and competitive pricing for consumers.
  • Encouraged technological convergence, allowing companies to offer bundled services such as TV, internet, and phone.
  • Facilitated a surge in investment and innovation as companies vied to capture the changing market.
Though it spurred growth and competition, it also posed new regulatory challenges, particularly concerning fair access to networks and competitive practices.
Role of the Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission (FERC) plays a vital role in the deregulation process of the energy sector. Since the 1980s, FERC has deregulated certain segments, focusing on:
  • Establishing competitive wholesale electricity markets to foster competition.
  • Implementing open-access policies, ensuring non-discriminatory access to transportation systems.
  • Facilitating rate-setting to better reflect market conditions and operational costs.
FERC's initiatives have led to more competitive energy markets, but also highlight the complexity of balancing deregulation with the need for reliability and fair pricing.

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