<h2>Doubts about the Regulation of Prices and Quantities</h2>
<p>Beginning in the 1970s, it became clear to policymakers of all political leanings that the existing price regulation was not working well. The United States carried out a great policy experiment—the <strong>deregulation</strong> discussed in <a data-page="40" href="https://app.ulearngo.com/tutorials/monopoly/">Monopoly</a>—removing government controls over prices and quantities produced in airlines, railroads, trucking, intercity bus travel, natural gas, and bank interest rates. The Clear it Up discusses the outcome of deregulation in one industry in particular—airlines.</p>
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<h3 data-type="title">What are the results of airline deregulation?</h3>
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<p>Why did the pendulum swing in favor of deregulation? Consider the airline industry. In the early days of air travel, no airline could make a profit just by flying passengers. Airlines needed something else to carry and the Postal Service provided that something with airmail. And so the first U.S. government regulation of the airline industry happened through the Postal Service, when in 1926 the Postmaster General began giving airlines permission to fly certain routes based on the needs of mail delivery—and the airlines took some passengers along for the ride. In 1934, the Postmaster General was charged by the antitrust authorities with colluding with the major airlines of that day to monopolize the nation’s airways. In 1938, the Civil Aeronautics Board (CAB) was created to regulate airfares and routes instead. For 40 years, from 1938 to 1978, the CAB approved all fares, controlled all entry and exit, and specified which airlines could fly which routes. There was zero entry of new airlines on the main routes across the country for 40 years, because the CAB did not think it was necessary.</p>
<p>In 1978, the Airline Deregulation Act took the government out of the business of determining airfares and schedules. The new law shook up the industry. Famous old airlines like Pan American, Eastern, and Braniff went bankrupt and disappeared. Some new airlines like People Express were created—and then vanished.</p>
<p>The greater competition from deregulation reduced airfares by about one-third over the next two decades, saving consumers billions of dollars a year. The average flight used to take off with just half its seats full; now it is two-thirds full, which is far more efficient. Airlines have also developed hub-and-spoke systems, where planes all fly into a central hub city at a certain time and then depart. As a result, one can fly between any of the spoke cities with just one connection—and there is greater service to more cities than before deregulation. With lower fares and more service, the number of air passengers doubled from the late 1970s to the start of the 2000s—an increase that, in turn, doubled the number of jobs in the airline industry. Meanwhile, with the watchful oversight of government safety inspectors, commercial air travel has continued to get safer over time.</p>
<p>The U.S. airline industry is far from perfect. For example, a string of mergers in recent years has raised concerns over how competition might be compromised.</p>
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<p>One difficulty with government price regulation is what economists call <strong>regulatory capture</strong>, in which the firms supposedly being regulated end up playing a large role in setting the regulations that they will follow. When the airline industry was being regulated, for example, it suggested appointees to the regulatory board, sent lobbyists to argue with the board, provided most of the information on which the board made decisions, and offered well-paid jobs to at least some of the people leaving the board. In this situation, consumers can easily end up being not very well represented by the regulators. The result of regulatory capture is that government price regulation can often become a way for existing competitors to work together to reduce output, keep prices high, and limit competition.</p>

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Doubts About Regulation of Prices and Quantities

Economics studies social behavior guiding the allocation of scarce resources to meet the unlimited needs and desires of the individual members of a given society, and for the production of goods and services, growth of production and welfare over time, and a great variety of other complex issues of vital concern to society. 

Economics

Discover the ins and outs of monopolies and antitrust policies, including corporate mergers, regulations for approving mergers, concentration ratios, and the Herfindahl-Hirshman Index, alongside new directions for antitrust, regulating anticompetitive behavior and natural monopolies, and the effects of deregulation.


Doubts About Regulation of Prices and Quantities

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