Did deregulation work?

Anonymous asked this question on 5/7/2000:

What is the basic theory underlying regulation and deregulation? In the 1980`s the public desired deregulation, did it work? were the majority happy with the outcome? What were the benefits and the costs of this change?

JesseGordon gave this response on 5/7/2000:

For a lengthy answer on this subject, you should ask it in an Economics section. But I'll give you a brief answer:


People push for government regulation when they perceive a problem that can't or won't get addressed by non-government methods.

The political basis might be that corporations or rich individuals wield too much power relative to average citizens, and hence should be regulated in their use of concentrated power. This argument was used, for example, in breaking up the telephone company -- its power was seen as monopolistic and hence squashing competition by potential rivals.

The economic basis might be that there is a "market failure", which means that the normal market processes won't work without government intervention. In the case of the phone monopoly, the "market failure" was the immensely high cost of entering the telephone business, because running phone wires to millions of people was prohibitively expensive for anyone other than the federal government. Hence the Feds allowed a government-subsidized monopoly in order to expedite getting national telephone service.


People push for deregulation because the market works more efficiently than the government. So, unless there is a compelling reason to maintain government involvement, a capitalist democracy should always choose the free-market solution. Continuing the phone company example, the monopoly should be broken up as soon as it is possible to have a competitive system instead of a regulated monopoly.


No one can say if regulation and deregulation "work" in general -- you have to look at particular cases. In the example of the telephone monopoly above, here's my conclusions:

1) The telephone monopoly achieved the creation of a national phone system, including wiring to the most remote corners of the US. Hence regulation "worked" for decades.

2) When the phone company was broken up, the phone system was sufficiently mature that other companies could compete with Ma Bell. Hence that industry was ripe for deregulation.

3) Certainly the competitive telephone system we have now is cheaper than the monopoly system we had before; i.e., an individual telephone call costs less now than it did before. Also, individuals have more choice in calling plans, in owning their own telephones (that used to be disallowed!) etc. Hence deregulation "worked" and created a real benefit for the public.

4) Many people are dissatisfied with the over-persistence of competing phone companies' weekly calls to change phone service. And the plethora of choices is confusing, even if they don't call. This ongoing annoyance is a real cost to many people.

5) Is the majority happy with this outcome? It looks to me like they are -- I don't see any political pressure to re-regulate the phone system or restore the phone company's monopoly. People grumble at the costs, but there's no mass movement to return to the old system.

-- You can apply that same framework to other monopolies in the US:

a) Perhaps mail delivery is ripe for deregulation now; the US Postal Service's monopoly, once needed to set up a nationwide system, now seems pointless with the existence of FedEx, DHL, and dozens of other letter carriers.

b) Electric utility deregulation is another hot topic; they too were once considered necessary monopolies because laying wire and building plants was prohibitively expensive. Many states have now deregulated electricity production.

c) The MicroSoft case is the latest hot federal issue in monopoly deregulation. You can be sure that case will be questioned for its costs and benefits for decades to come, like the phone company breakup in the past. Details on the current politics of the Microsoft case are available at

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