Major Steps Toward Deregulation

A recent study by the Brookings Institution documented important benefits of deregulation. In five major industries—natural gas, telecommunications, airlines, trucking, and railroads—that were deregulated, it was found that regulatory reform generated highly beneficial results.2 Prices fell 4 percent to 15 percent within the first 2 years after deregulation. Within 10 years, prices were 25 percent to 50 percent lower. Deregulation also leads to service quality improvements. Crucial social goals like airline safety, reliability of gas service, and reliability of the telecommunications network were maintained or improved by deregulation. Regulatory reform also tends to confer benefits on most consumers. Although it is possible to find narrowly defined groups of customers in special circumstances who paid somewhat higher prices after deregulation, the gains to the vast majority of consumers far outweighed negative effects on small groups. Finally, deregulation offers benefits in the sense of permitting greater customer choice.

Table 13.1 highlights some of the major steps taken toward deregulation in the United States since 1970. Although many industries have felt the effects of changing state and local regulation, changing federal regulation has been most pronounced in the financial, telecommunications, and transportation sectors. Since 1975, for example, it has been illegal for securities dealers to fix commission rates. This broke a 182-year tradition under which the New York Stock Exchange (NYSE) set minimum rates for each 100-share ("round lot") purchase. Until 1975, everyone charged the minimum rate approved by the NYSE. Purchase of 1,000 shares cost a commission of 10 times the minimum, even though the overhead and work involved are roughly the same for small and large stock transactions. Following deregulation, commission rates tumbled, and, predictably, some of the least efficient brokerage firms merged or otherwise went out of business. Today, commission rates have fallen 70 percent to 90 percent or more, and the industry is noteworthy for increasing productivity and the variety of new product introductions. It is also worth mentioning that since brokerage rates were deregulated, the number of sales offices in the industry, trading volume, employment, and profits have skyrocketed. All of this may lead many observers to conclude that deregulation can benefit consumers without causing any lasting damage to industry. In fact, a leaner, more efficient industry may be one of the greatest benefits of deregulation.

In Canada, the deregulation movement led to privatization of government-owned Air Canada. Trucking, historically a regulated industry, also was deregulated. Specialized telecommunications services industries were deregulated and thrown open to competition. In other

2 See Robert Crandall and Jerry Ellig, Economic Deregulation and Customer Choice: Lessons for the Electric Industry, Center for Market Processes, Fairfax, VA, 1997.

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