In evaluating the effects of deregulation, and in gauging the competitive implications of market exit by previously viable firms, it is important to remember that protecting competition is not the same as protecting competitors. Without regulation, it is inevitable that some competitors will fall by the wayside and that concentration will rise in some markets. Although such trends must be watched closely for anticompetitive effects, they are characteristics of a vigorously competitive environment. Although some think that there is simply a question of regulation versus incentive-based regulation
Rules that benefit consumers through enhanced efficiency deregulation, this is seldom the case. On grounds of economic and political feasibility, it is often most fruitful to consider approaches to improving existing methods of regulation.
An important problem with regulation is that regulators seldom have the information or expertise to specify, for example, the correct level of utility investment, minimum transportation costs, or the optimum method of pollution control. Because technology changes rapidly in most regulated industries, only industry personnel working at the frontier of current technology have such specialized knowledge. One method for dealing with this technical expertise problem is to have regulators focus on the preferred outcomes of regulatory processes, rather than on the technical means that industry adopts to achieve those ends. The FCC's decision to adopt downward-adjusting price caps for long-distance telephone service is an example of this developing trend toward incentive-based regulation. If providers of long-distance telephone service are able to reduce costs faster than the FCC-mandated decline in prices, they will enjoy an increase in profitability. By setting price caps that fall over time, the FCC ensures that consumers share in expected cost savings while companies enjoy a positive incentive to innovate. This approach to regulation focuses on the objectives of regulation while allowing industry to meet those goals in new and unique ways. Tying regulator rewards and regulated industry profits to objective, output-oriented performance criteria has the potential to create a desirable win/win situation for regulators, utilities, and the general public. For example, the public has a real interest in safe, reliable, and low-cost electric power. State and federal regulators who oversee the operations of utilities could develop objective standards for measuring utility safety, reliability, and cost efficiency. Tying firm profit rates to such performance-oriented criteria could stimulate real improvements in utility and regulator performance.
Improvement in government control to enhance efficiency and fairness
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