Deregulation Facts

Deregulation occurs when the government lifts controls on industries. These controls can range from low-level regulation to full nationalization, and lifting them can have a wide range of both positive and negative consequences.

Competition

• Deregulation is generally used in order to generate more competition in a given industry. This is done because regulations lower competition by lowering incentives for people to get into the industry in question. For example, U.S. airlines had their fares, routes and schedules determined by the government until 1978. Deregulation inspired competition and allowed more companies to get into the U.S. air travel industry.

Delayed Consequences

• Deregulation can have far-reaching, unpredictable consequences. For example, the gradual deregulation of the U.S. financial sector has been attributed to the 2008 financial crisis. This is because bankers had no incentive to make decisions that held the system up as a whole; rather, they were able to carry out deals like securitization of mortgages that gave them short-term profits while creating an unsustainable system.

Price Changing

• In general, a heavily-regulated industry tends to have stable prices where highs and lows are uncommon. However, deregulation can make industries follow the free market more closely, which does not always create low prices. For example, California deregulated its power industry in 2000, creating a situation where there was less power to sell and only two companies to sell it. This resulted in threefold price increases.