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Derivatives

Although government regulation is pervasive, it is emphasis on establishing clearly defined property rights,
apparent that regulation may not achieve the lofty goals which allows the market to automatically internalize the
set out in the initial effort to regulate. Governments can cost to buyers and sellers, making government regulation
also fail, and government failure often aggravates the costly and unnecessary. The EPA depends less heavily on
problems it sets out to solve. Public choice economists its command-and-control approach and more heavily on
have identified several specific causes of government fail- tradable permits, reducing the overall level of pollution
ure. Voters are often rationally ignorant about many and allowing firms to avoid pollution in a more cost-
things, and they vote for political candidates who are effective way.
uninformed or misinformed. Also, politicians are often Although Congress has deregulated specific indus-
indebted to their financial supporters, some of whom are tries, social regulation designed to protect consumers has
regulated industries, and will often enact laws favorable to expanded. Through such agencies as the Occupational
their supporters regardless of the negative impact on the Safety and Health Administration, the Consumer Product
public. Politicians may even be willing to sacrifice the Safety Commission, the Food and Drug Administration,
future for the sake of short-term benefits for their finan- the Equal Employment Opportunity Commission, and
cial supporters. Recognition of such limitations to govern- the EPA, the government is attempting to provide safer
ment regulation has caused Congress to rethink products, better health care, fairer employment practices,
regulation, especially as it relates to certain industries. and a cleaner environment. Government at federal, state,
Beginning in the mid-1970s, increased dissatisfaction and local levels has also continued to increase license
with the burdens of regulation, especially the costs requirements for numerous occupations and professions.
imposed on consumers, led to the deregulation of a num- Many economists wonder if the benefits are high
ber of industries, including the airlines (Airline Deregula- enough to warrant the cost of regulation. In addition to
tion Act of 1978), natural gas (Natural Gas Policy Act of regulatory-imposed limits on consumer freedom, product
1978), trucking (Motor Carrier Act of 1980), and bank- prices rise, administrative costs are high, and some firms
ing (Depository Institutions Deregulation and Monetary are driven out of business, thereby reducing competition.
Control Act of 1980). To further complicate things, many special-interest groups
In 1997 some states began deregulating the produc- use such laws to increase their wealth at the expense of
tion and sale of electricity. Technologies permit small others. It has been estimated that federal regulation costs
companies to produce electricity at reduced costs. Under each household $6000 per year. Clearly the issues sur-
the new system (much like the system in the telephone rounding regulation/deregulation will continue to be dis-
industry), local utilities must permit competitors to use cussed into the twenty-first century.
their electric lines for a fee.
Benefits from deregulation include reduced prices BIBLIOGRAPHY
and increased choices for consumers. Competition among Kahn, Alfred E. (1988). The Economics of Regulation: Principles
long-distance telephone suppliers is keen, no longer and Institutions. Cambridge, MA: MIT Press.
requiring government regulation, and is demonstrated by Kahn, Alfred E. (2004). Lessons from Deregulation: Telecommuni-
the fact that from 1985 to 1998 prices declined 72 per- cations and Airlines After the Crunch. Washington, DC:
cent. Expanded service and reduced prices have occurred Brookings Institution Press.
in both airlines and trucking. Eleven thousand new truck- Teske, P., Best, S., and Mintrom, M. (1995). Deregulating
Freight Transportation. Washington, DC: AEI Press.
ing lines started up within three years of deregulation, and
savings may be as high as $50 billion per year. Winston, C. (1993, September). “Economic Deregulation” Jour-
nal of Economic Literature, 1263-1289.
Some concerns have arisen about deregulation, how-
ever. The airline industry has become more concentrated
since deregulation. In 1978 eleven carriers handled 87 James R. Rinehart
percent of the traffic, while in 1995 seven carriers handled Jeffrey J. Pompe
93 percent of the traffic. Although some feared reduced
safety, that has not materialized. Some of the bank failures
in the 1980s were attributed to deregulation, yet deposi-
tors receive higher interest. On balance, deregulation DERIVATIVES
effects have been positive. Derivative instruments are used as financial management
A significant change in direction has also taken place tools to enhance investment returns and to manage such
with regard to government regulation of industries pro- risks relative to interest rates, exchange rates, and financial
ducing externalities. Many externalities arise because of instrument and commodity prices. Several local and inter-
the lack of property rights; consequently there is greater national banks, businesses, municipalities, and others

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