Deregulation

• Author: James Rinehart, Jeffrey Pompe
• Pages: 194-195

Page 194

Most societies rely on competitive markets to handle the allocation of scarce resources to their highest and best uses. Yet markets are not without their shortcomings. For this reason, governments sometime institute regulatory control. In 1887, the first regulatory agency, the Interstate Commerce Commission, was created to regulate monopolistic pricing policies of railroads.

When private firms gain monopoly power, usually because of economies of scale, they are in a position to restrict production and raise price with little worry of competition; these are known as natural monopolies. The government may permit a single producer (e.g., of natural gas or electricity) to exist in order to gain lower production costs but simultaneously empower a regulatory agency to set the firm's prices.

A second reason for regulation stems from the fact that society declares certain activities illegal. Prostitution, gambling, and certain drugs are either not permitted or allowed only under certain conditions. Through a licensing system, government agencies control who enters such industries, their prices, and their methods of operation.

Another reason for government regulation arises because society establishes standards for particular professions, such as medicine, law, accounting, and real estate. The government guarantees compliance with these standards by imposing tests and other requirements. Those failing to meet these standards are not permitted to engage in that business. Hundreds of agencies administer tests and police the professions, all done ostensibly in the interest of protecting the consumer. Interestingly, license holders often push for even higher licensing requirements, often grandfathering in all current license holders, because higher salaries are possible when the number of competitors is restricted.

Many government regulations are designed to protect people from the negative consequences (i.e., externalities) of buyers and sellers who have little incentive to look out for the welfare of third parties. For example, slaughterhouses may have the freedom to kill animals for sale to their customers in grocery stores without taking into account obnoxious odors or sounds emanating from the slaughterhouse. Neighborhood residents, however, incur externality costs. Through agencies such as the Environmental Protection Agency (EPA), the government controls what slaughterhouses can and cannot do in order to lessen the...