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 beimplemented in practice?

Stage 2: Implementation

The CAB determined that its primary objective should be to insure that “economical” air

service would be widely available.

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.

Hear Professor Brown’s comment (wav)

Stage 3: Deregulation

For an overview see Clifford Winston, "Economic Deregulation: Days of Reckoning for Microeconomists," Journal of Economic Literature, September 1993:1263-1289.

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.

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)

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