Deregulation involves removing government legislation and laws in a particular market. Deregulation often refers to removing barriers to competition.
For example, in the UK, many industries used to be a state monopoly – BT, British Gas, British Rail, local bus services, Royal Mail. However, deregulation allowed new firms to enter these markets and reduce the monopoly power of these state owned industries. This process of deregulation was often accompanied by privatisation. (Selling of state-owned assets to private sector)
A good example of deregulation is mail delivery. For many years, the government-owned Royal Mail had a legal monopoly on delivering letters and parcels. The Royal Mail had a duty to deliver a letter anywhere in the UK, but competition was not allowed.
Firstly, competition was allowed in parcels, then in 2006, any licensed operator is allowed to deliver letters and parcels to business and residential customers. (Royal Mail competition at BBC)
Another type of deregulation is where the government removes controls and statues relating to the financial sector. For example, to deal with financial instability, governments have placed requirements banks keep a certain percentage of deposits in liquid assets. Deregulation of the 1980s and 90s allowed financial firms greater freedom to set their own liquidity ratio and types of financial products they offered.
Financial deregulation is blamed for some of the credit bubble which preceded the credit crunch of 2008.
In 1978, the US opened its airways to competition.
The Economist reports, air tickets fell by 33%, and air traffic increased by more than 100% by the end of the 1980s. This was helped by low-cost airlines such as American West and Southwest Airlines, who used more smaller airports to offer a greater range of flights to small cities.
However, deregulation in the airline industry has not been an unqualified success, some airlines have gone out of business and the big three airlines have seen their market share of long-distance traffic rise from 30% in 1978 to more than 60% by the early 1990s.
It shows the difficulty of deregulating airlines where there are significant economies of scale and access to crucial ‘hub airports’ is difficult because demand for slots exceeds the supply.
Advantages of Deregulation
- Increased competition acts as a spur to greater efficiency, leading to lower costs and prices for consumers.
- In some markets, such as airlines and telecoms, deregulation has enabled an increased number of firms, allowing lower prices for consumers. This is particularly noticeable with low-cost airlines and falling prices of telephone calls.
- Government regulation often involves excessive costs of bureaucracy.
- Deregulation allows consumers greater choices
Disadvantages of Deregulation
- It can be difficult to create effective competition in an industry which is a natural monopoly – high barriers to entry. Deregulation may create a private firm with monopoly power.
- In the local bus market, deregulation often led to duplication of services and the problem of congestion. Local buses are an industry where more than one firms create different kinds of problems.
- Also, new private firms will seek to cherry-pick the most profitable routes and times and leave out the unprofitable off-peak services.
- Deregulation could lead to a compromise of public services with a poorer quality of provision. Private firms have an incentive to cut costs and provide a lower quality of service.
- Deregulation in train services led to the process of franchising where companies were awarded contracts for a particular time period. There is competition in the bidding process but no guarantee firms will live up to their promises. In the UK railway industry, the government had to take over a failing private firm on a number of occasions.