Students often ask about the consequences of deregulation. If the government is closely regulating an industry, be it railroads, the airlines, banking, or cable tv, then it does so in the name of ensuring competition. Without the regulation, wouldn't the businesses just "charge whatever they want" and "take advantage" of the customers? Without the regulation prices would go up, and the greedy firms would just sit back on their past achievements not being productive, right?
Wrong! Not according to the data we have. According to history, when industries are closely regulated, prices tend to go up (not down) and productivity tends to stay low. When industries are DEregulated, prices actually fall, and productivity increases. Here is a graph dramatically illustrating this fact from this week's Economist magazine:
(the red line indicates deregulation of the US railroads)
Notice - after railroads were deregulated, prices dropped by 50%. The insightful article in the Economist discusses the fact that, prerhaps surprisingly, the US has the most competitive and the cheapest freight rail system in the world. Did you know that? So why is it that the passenger railways are not doing so well in the US? (Hint: it has to do with regulation!)
Click the image below to go to the full article on US railroads in the Economist.
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