Governments intervene in the private markets by coming up with regulatory policies that govern the markets. Through regulation, governments adjust income distribution and resource allocation to what they consider appropriate. They do this to ensure the welfare of the people by preventing unfair practices such as monopolizing the markets by few individuals and therefore limiting the benefits of the rest, to protect the industry among others. Heavy government regulation has been imposed on the transportation industry in the United States.
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Effects of Regulation and Deregulation
Various factors are affected in the regulation of the transport industry. These include the regulation on prices, rate of return, entry and exit, condition of service, financial arrangements, and antitrust regulations. In the transport industry, the government sets regulations for the maximum and minimum prices that can be charged to the passengers. This protects the customers from unreasonably hiked prices. Minimum pricing also protects the industry from practices like predatory pricing or monopolizing the market (Bailey and Pack, 1995).
In the rate of return regulation, governments regulate carriers on the basis of rates. A carrier that made returns that were more than fair had its change proposal disapproved. In condition to service regulation of air transport, the government regulates what type of aircraft is used and the capacity it offers. The frequency of service is also regulated.
Exit and entry into certain industries and routes is also regulated. After deregulation, new entrants do not need to prove their need for a new service. Regulation made entry to routes difficult and a license was necessary for both land and air transport. After deregulation, it was much easier to enter into these routes. When the exit from routes was regulated, it was hard for carriers to exit from routes. After deregulation it has become much easier to exit routes (Bailey and Pack, 1995).
Regulation has various economic effects. Regulation of entry helps to alleviate competitive pressure. Regulation of prices results in too much quality competition and inefficiency and inflexibility of the system. Regulation of rate of return leads to inefficiency. Regulation also causes stagnation in innovation in the surface and air transport. In addition, regulation leads to more expensive rates in one mode of transport and this distorts allocation of traffic and other sectors of the economy. Therefore, it is ironical that regulation is one of the reasons of failure in markets and yet it was introduced to get rid of the failure (Grether, Balderston,Carman and Nicosia, 1981).
Deregulation also has several effects on the economy. Deregulation of air transport began in the 1960’s while that of surface transport began in the 1980’s. Deregulation of the markets was an effort to make reforms to the existing regulation policies. Deregulation was only partial and affected some parts of the industry. However, after deregulation operations in the transport industry were more smooth and easier to carry out (Gerston, Fraleigh and Schwab, 1988).
From the above discussion, it is evident that the regulation and deregulation of the surface and air transportation has had significant economic impacts on the industry. Regulation was introduced to protect the society and industry from unfair practices. However, it had negative economic effects on the industry. It was introduced to counter failure in the markets but ended up contributing to more of it. Therefore, the transport industry was deregulated to make the processes run more smoothly.
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Bailey, E.E. and Pack, J.R. (1995). The Political Economy of Privatization and Deregulation. California: E. Elgar.
Gerston, L.N., Fraleigh, C. and Schwab, R. (1988). The Deregulated Society. USA: Brooks/Cole Pub. Co.
Grether, E.T., Balderston, F.E., Carman, J.M. and Nicosia, F.M. (1981). Regulation Of Marketing And The Public Interest: Essays In Honor Of Ewald T. Grether. USA: Pergamon Press.