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Unformatted text preview: Regulation and the
Economics and the Invisible Hand The Invisible Hand
What is Economics? An attempt to explain and justify market systems. Invisible Hand = Individuals pursuing their own goals and interests, nonetheless, accomplish society’s goals. Two Sectors of the Economy
Public Sector and Public Utilities The Public Sector
Allocation of resources determined by the market mechanism.
Decisions of firms are subject to direct governmental regulation. Public Utility Regulation
Components of Regulation
Control of Entry and Exit Price Controls Antitrust Regulation Prescription of quality and conditions of service
Common Carrier Obligation Affected with the Public Interest
Affected The Rationale for economic regulation. Justification for government intervention into the private sector. Importance of the Industry. Natural Monopoly/Economies of Scale. Market Failure Infant Industry Argument. Common Features of
Demand Elasticities Vary Sharply Output fluctuates regularly and steeply. Peak period problems.
Users are connected physically. Captivity.
Output of suppliers is vital. Regulation Ratifies Monopoly
Regulation Regulation may ratify monopoly when it is in the public interest. Prevent exploitation in the face of market power (dominance). Reap the benefits of economies of scale (utilities). Avoid the use of public capital, i.e., replaces direct subsidy. Hazards of Regulation
Political solutions to economic problems.
Not an effective substitute for markets. Regulation is static, the market dynamic. Rights of Regulated Firms
Reasonable Profits - ROI
Protection from Competition
Governing rules must be
reasonable Duties of Regulated Firms
Prices Must be Reasonable. Demand must be met. However, no peak period requirements.
Safety of the public must be met, i.e., no abdication of safety regulation. Regulation of Transportation
Regulation Assuming extreme market structures, the decision regarding regulation would be simple. Perfectly competitive – no regulation needed – Adam Smith’s Invisible Hand rules. Monopoly – regulation required to protect from the abuses of market power. Regulation of Transportation
Regulation The problem occurs when we consider market structures that are not clearly competitive or noncompetitive. Assuming perfect markets, regulation not desirable. However, typically markets are imperfect thus justifying regulation. Government Control
Government Can take several different forms. Maintaining or enforcing competition through antitrust law. Substitute regulation for competition. Not as good as marketplace competition. Government ownership or direct control. Subsidy. Levels of Regulation
Levels Regulation of transportation exists at the local, state, and Federal levels. Federal government must regulate interstate commerce. Why? States are limited to intrastate transportation. Federal regulation typically overseen by independent regulatory agencies. Federal Agencies
Federal ICC STB in 1995 FMC FERC Safety Regulation
Safety FAA FMCSA NHTSA FRA NTSB Regulation Yesterday and Today
Regulation Table 3.1 on page 62 provides an overview of the evolution of regulation. Today most transportation is deregulated. Air deregulated in 1977 and 1978. Motor 1980 – Inherently competitive. Regulation Con’t
Regulation Water – Mostly exempt. Pipeline – FERC Rail 1980 – Staggers Rail Act. Only market dominance situations are subject to regulation. Situations where shippers have no options. Antitrust Laws
Antitrust Sherman Antitrust Act 1890 – Restraint of trade illegal. Monopolizing trade a felony. Clayton Act – 1914 – attempts to monopolize – predatory pricing. ReedBulwinkle Act of 1948 – collective ratemaking limited. Transportation Policy
2. Why is it important to have a National Transportation Policy?
Key elements of our National Transportation Policy include:
rely on market forces to the extent possible.
Minimize the need for Federal regulatory controls. Transportation Policy Con’t
8. Promote a safe and efficient transportation system.
Ensure the development of a sound transportation system.
Maintain reasonable rates.
Reduce regulatory barriers to entry.
Prohibit predatory practices.
Encourage and promote energy conservation. More Transportation Policy
12. Preserve the inherent advantages of each mode.
Meet the needs of shippers, receivers, passengers, and consumers.
Promote intermodal transportation. Who Establishes Policy?
Who Executive Branch – President, Secretary of Transportation. Legislative Branch – Congress via laws. Regulatory Agencies – Interpretation. Judicial Branch – interpret the laws and reconcile conflicts. Industry Associations Lobby Promotion of Transportation
Promotion The Federal Government has historically been the major promoter of transportation. Highway Trust Fund. Airports and Airways – Air Traffic Control Water ways. US. Army Corp of Engineers – Benefit/Cost Ratios. Promotion Con’t
Promotion Essential Air Service Subsidy. Defense Contractors development of new aircraft. Cabotage – Flags of Convenience – Cargo Preference. Rail Passenger Service – Amtrak and mass transit – FTA. User Fees
User Collection of some of the subsidy money from those who benefit. Tolls Gasoline Taxes Airport landing fees Port dockage fees. Modes Not Subsidized
Modes Rail Pipeline Implications on Fixed and Variable Cost to be discussed under pricing issues. ...
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