Regulation and Deregulation - the Case of Airline Industry

Regulation and Deregulation - the Case of Airline Industry



The term ‚regulation‘ in the economy generally means rules and restrictions designed to modify the behaviour of firms and individuals in the market. Regulation narrows the choices in certain areas including price, output, rate of return, methods of production or conditions of service. Regulation is based on the assumption that relying on competitive market forces in a certain sector of economy will not deliver an optimal outcome.

The principal declared objective of such restrictions is to serve the public interest. State intervention can be justified in case where a certain sector performs or is considered to perform inefficiently due to a market failure and thus leads to sub-optimal allocation of resources. This could be due to the existence of public goods, imperfect competition (monopoly, oligopoly etc.) or substantial negative externalities (e.g. pollution).

Another case where it might be necessary to impose some form of regulation in order to obtain a socially optimal outcome is when a certain social group would otherwise be subject to disadvantages. One example of such disadvantages has been the reduction or suspension of flight connections at smaller community airports in the USA, which will be described more in detail in Section Flight Frequency, Schedule and Route Structure. Although a state intervention in a such case does not necessarily increase efficiency in the particular industry, it might be considered desirable as a whole from the social point of view. In other words, regulation can also be utilised to correct injustices, not only inefficiencies.1

All these arguments can be viewed as a part of the Public Interest Theory of regulation.2 In general terms, this concept suggests that state intervention is protecting the public from the negative impact of market failures. However, this view essentially relies on several assumptions that are not always realistic,...

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