The Regulated Industries and the Economy

Abstract

This small book is a fine survey of the literature dealing with the costs and benefits of regulation. One chapter deals with of public utilities, airlines, and surface freight transportation, and another focuses on environmental and safety regulation. MacAvoy extends the research on the costs of by comparing prices, investment, and rates of return for regulated industries with unregulated. It is to be hoped that this book will have extensive sales in Washington. My only regret is that a number of small inaccuracies and overstatements subtract from the general excellence. MacAvoy starts with a broad description of the spread of regulation. Even though he does not make it clear, his emphasis is on federal controls; state has usually preceded federal but remains practically unmentioned in this volume. The author attributes the growth in basically to the government's attempts to control prices and qualities in markets where competitive forces were absent or small. This is the traditional view of the causes of regulation, but it is a view increasingly questioned. Perhaps he has oversimplified the factors involved in the establishment of to keep down the size and cost of the book. The author in earlier works has written extensively of the reasons behind the establishment of the Interstate Commerce Commission. In these works MacAvoy has shown that the railroads themselves were supportive of the concept of federal control, yet he writes, For instance, they [regulatory commissions] gained jurisdiction over railroads in response to public antagonism toward oligopolistic pricing practices (p. 19). Chapter 2 deals with price and entry control in the traditional regulated industries. In discussing of such industries as electric power, gas retailing, telephone, and airlines, the author argues that during the 1950s and early 1960s regulation could produce either (1) lower prices by constraining monopoly power, or (2) the same price level because of ineffective procedures, or (3) higher prices in order to expand investment and capacity so as to provide subsidized services (p. 35). But his third possibility is not logical. The most profitable position is the unconstrained monopoly. Regulation might be able to force monopolists to dissipate some of their rents on certain desired goals, but that would not mean that prices were higher. It is true that might also force up costs such