Introduction to Economic
Regulation
Economic regulation "refers to
government-imposed restrictions on firm
decisions over price, quantity, and entry
and exit” [Viscusi, Vernon, and
Harrington, p. 307].
In contrast to social regulation,
economic regulation involves the
oversight of specific industries
such as railroads, trucking,
electrical utilities, and telephone
service by "old style" regulatory
agencies.
Examples of Economic or “Old Style”
Regulatory Agencies
•Interstate Commerce Commission (ICC)
•Federal Communications Commission (FTC)
•Civil Aeronautics Board (CAB)—now defunct.
•Federal Energy Regulatory Commission (FEC)
•Arkansas Public Service Commission
The tools of economic regulation
include control of price, control
of quantity, control or entry and
exit, or control of other variables.
Control of price
•Public service commissions must approve rate increases
recommended by the public utilities who they regulate.
•Usury ceilings in the state of Arkansas.
• FCC-imposed caps on long distance rates.
Control of quantity
•Maximum production limits on Texas crude oil producers
imposed by the Texas Railroad Commission.
•"Common carrier" obligations carried by regulated electric
utilities--"meet all demand at the regulated price.“
• The peanut quota system
Control of entry and exit
•The supply of New York City taxicab medallions are limited is
11,878.
•Prior to 1983, Civil Aeronautic Board (CAB) regulated entry of
new carriers for interstate flights. So if Delta decided it wanted
to offer service to a new destination, it had to obtain CAB
certification first.
•Prior to 1959, AT&T has exclusive rights to microwave
frequencies above 890 megacycles.
Control of other variables
•Minimum capacity requirements imposed on electric
utility companies.
•Regulatory commission approval sometimes need for
major investment projects.
Overview of the
regulatory process
Viscusi, Vernon, and
Harrington describe a 3
stage regulatory process.
These stages are:
1. Legislation
2. Implementation
3. Deregulation
Stage 1: Legislation
Congress, a state legislature, city council, etc. passes a law
that establishes regulatory authority over a particular industry.
The legislation often supplies a broadly defined mandate to the
responsible agency (which may have been created as a result of
the legislation).
Example: 1938 Civil Aeronautics Act--the Civil Aeronautics
Board (CAB) created to: (1) promote airline safety; (2) to
insure the industry operates in an economically sound
fashion; and (3) to allow for the adaptation of the airline
system to the commercial, postal, and defense needs of the
country.
It is up to the regulatory
agency to implement the
legislation. Thus, the first
problem for the CAB was :
How should the mandate
issued by Congress be
implemented in practice?
Stage 2: Implementation
The CAB determined that its
primary objective should be to
insure that “economical” air
service would be widely
available.
Hear Professor Brown’s comment (wav)
To achieve its objective, the CAB established a
regulatory framework with the following elements:
•Regulation of entry and exit of carriers on interstate flights.
• CAB provides carriers with protection from price wars on
"competitive" or high traffic routes (e.g., New York to Dallas).
Carriers expected to provide regular service to smaller markets
(e.g., Cedar Rapids or Boise) at "reasonable" fares.
Stage 3: Deregulation
The 1971-96 is called the "era of
deregulation" because of the major
deregulatory initiatives passed—
e.g., the abolition of fixed
brokerage fees by the SEC in
1975, the Motor Carrier Reform
Act
of 1980, and the
Telecommunications Act of 1996.
For an overview see Clifford Winston, "Economic Deregulation: Days of
Reckoning for Microeconomists," Journal of Economic Literature, September
1993:1263-1289.
The Airline Deregulation Act of 1978
•Since 1982 entry has been granted on all interstate routes
to carriers that are "fit, willing, and able."
•All restrictions on fares lifted in 1983.
• The CAB is defunct.
Hear Professor Brown’s comment on travails of United
Airlines, et al. (wav)
Back to Lesson 9