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By the end of this section, you will be able to:

  • Evaluate the effectiveness of price regulation and antitrust policy
  • Explain regulatory capture and its significance

Governments at all levels across the United States have regulated prices in a wide range of industries. In some cases, like water and electricity that have natural monopoly characteristics, there is some room in economic theory for such regulation. But once politicians are given a basis to intervene in markets and to choose prices and quantities, it is hard to know where to stop.

Doubts about regulation of prices and quantities

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 deregulation    discussed in Monopoly —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.

What are the results of airline deregulation?

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.

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.

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.

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.

Questions & Answers

what is economic
Arome Reply
Explain four reason why scale of preference is necessery
Afusat Reply
What's a perfectly elastic demand
jessica Reply
what is the perfect elasticity of demand
Beltus
what is a balance budget
Azayi Reply
balance budget is when the expenses ND tax re equal
Joseph
types of cost curves
Lonwabo Reply
what is histogram
Stella Reply
What is the reason for demand
Taye Reply
hello good afternoon
sheriffvandy Reply
Hi
Tahira
hello
Divakar
hello
Shekerusegun
what is production possibility curve
Amina Reply
A curve that shows different combinations (amount) of two goods with a production of limited resources (it is based on the Scarcity principle)
Minalu
How demand and supply are related
Alimamy Reply
The law of demand states that "all other being equal ",the higher the price the lower the commodity and the lower the price the higher the commodity of purchase within a given period of time .
Emmanuel Reply
participants in market
LEHLOGONOLO Reply
do you have questions of cerculer flow
Pink
do the negative slope of production possibility curve sloped to show trade offs in production of two goods?
Bafokeng Reply
l need the law of demand
Gifty
The law of demand stated that all other things been equal the high the price the high the quantity demanded and vase visa
Amina
The Law of Demand states that ceteris Parabus" The higher the price of the commodity the lower the quantity demanded and the lower the price of the commodity the higher the quantity demanded.
Paul
how is economics not a science subject
Adio Reply
i need the main definition of economics
Okafor Reply
according to professor Richard lipsey economics is a social science that concerns with the way society has employ scarce productive resources in other to achieve a certain conditions of living
Confidence
We've got series of definition of economics, but the most acceptable definition is that of lord Lionel Robbins"economics can be defined as a social science which study human behaviors as a relationship between ends and scarce means which have alternative uses "
Musiliu

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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