Government regulation aims to correct market failures and protect consumers, but it can also stifle competition and innovation. Regulations can address issues like pollution and public health, but may create barriers to entry and increase costs for businesses and consumers.

Deregulation, on the other hand, can lead to increased competition and lower prices. Examples like the airline and telecom industries show how removing regulations can spark innovation and new services, but may also result in market concentration and quality issues.

Government Regulation and Deregulation

Impact on Competition and Efficiency

• Positive and negative effects of government regulations on market competition and efficiency
  • Address market failures and externalities (environmental regulations reduce pollution, protect public health)
  • Create barriers to entry, reducing competition (licensing requirements, quotas limit number of firms)
• Higher costs for firms passed on to consumers through increased prices
• Stifle innovation and limit flexibility of firms to respond to changing market conditions

Regulatory Capture

• Regulatory agency influenced or controlled by industry it is supposed to regulate
  • Industry representatives influence appointment of regulators or regulators have close industry ties
• Regulations benefit industry at expense of consumers and public interest
  • Protect incumbent firms from competition or allow higher prices
• Lax enforcement of regulations and lack of accountability for industry misconduct

Deregulation Effects

• Removal or reduction of government regulations in a particular industry
• Airline industry in the United States deregulated in 1978
  • Increased competition, lower fares, entry of new airlines
  • Also led to increased consolidation and emergence of a few dominant carriers
• Telecommunications industry partially deregulated in the United States in 1996
  • Greater competition in local telephone markets and entry of new providers
  • Growth of new services (broadband internet, mobile phones)
• Lower prices and increased innovation, but also potential concentration of market power and reduced service quality in some cases