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Working Paper

The Limits of Economic Regulation: The U.S. Experience

Peyton Wynns.  

International Bureau Working Paper 2 (June 2004) describes regulatory experience in four industries in which network connections are important: airline, railroad, trucking and telephone. Wynns, who originally presented this paper at a conference in Moscow in June 2003, identifies common themes regarding economic regulation particular to those industries.

Wynns demonstrates that, in all four industries, deregulation led to enormous productivity improvements and that direct subsides can work. He suggests that much of traditional economic regulation such as entry control, exit control, and price regulation is now in disrepute.  He identifies several general limitations of regulation:  it inevitably leads to the need for additional regulation, it is a slow process, it cannot always be technologically neutral, it slows new business strategies, it is hampered by regulators' inability to accurately predict the future, and it tends to result in regulated firms becoming dependent on regulation.

Wynns also discusses the benefits of regulatory flexibility, the importance of data collection efforts by government agencies, the value of benchmarks for assessing regulated companies, the need for independence of the regulator, the importance of transparency and impartiality of the regulator, and the benefits of direct subsidies and auction mechanisms compared to indirect subsidies and “beauty contests” to select winners.

 
Issued: June 2004
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