Deregulation is the removal or reduction of government regulations in a specific industry. The goals are to allow industries to operate businesses more freely, make decisions efficiently, and remove corporate restrictions.
Overall, the main objective is to remove barriers to competition so that a particular industry can compete in the international market more easily.
Deregulation in an industry occurs only through legislation, issuance of an executive order from the President, or when a federal agency stops enforcing the regulation.
Benefits of Deregulation
It stimulates economic activity because it eliminates restrictions for new businesses to enter the market, which increases competition.
Since there is more competition in the market, it improves innovation and increases market growth as businesses compete with each other. When more businesses compete with each other, prices go down for consumers.
Companies no longer need to utilize resources and capital to meet restrictions and comply with regulations. In turn, they can use the resources to invest in research and development.
Businesses can operate without worrying about restrictions and regulations to govern them. They are allowed to develop new products, set their own prices, venture into foreign countries, purchase new assets, and interact with consumers without restrictions to hold them back.
Consequences of Deregulation
Without restrictions in place, small businesses are at a higher risk of being driven out of the market by larger, more established companies. The larger companies are capable of creating monopolies to take control of the market.
In some cases, deregulation may not protect the consumers’ best interests. For example, regulation in the banking industry requires banks to maintain a certain amount of cash on hand, which helps individuals who need to withdraw their money.
Companies may not provide insight and transparency to the public about how businesses in a deregulated industry are operating. For example, regulations in the financial sector govern how public organizations need to publish financial statements, which allows investors to understand the company and enables them to make investment decisions.
Without rules and control from the government, businesses can commit fraud more easily, putting consumers at risk.
Example of Deregulation in the Banking Industry
Deregulation in the financial industry enabled banks and other financial institutions the autonomy to decide how they would use and allocate their capital. It allowed banks to compete with international competitors and invest their money into securities without regulations to inhibit them from doing so.
In the U.S., banks became deregulated due to the repeal of the Glass-Steagall Act in 1999. The law was initially introduced in 1933 as a way to prevent banks from using funds and deposits from their clients to buy risky securities for fear of losing their clients’ money.
The repeal of the legislation meant that banks were allowed to invest in low-risk securities only. However, banks did not follow through and began investing in high-risk financial derivatives instead. As a result, many countries blamed the deregulation of the banking industry for the Global Financial Crisis of 2008.
Example of Deregulation in the Transportation Industry
In the U.S., the Airline Deregulation Act of 1978 eliminated restraints in the airline industry. It was important because the regulation of airlines before the legislation was introduced meant that there were many inefficiencies in the market.
For example, the Civil Aeronautics Board governed routes, set airfare prices, and guaranteed 12% profit for the airline company for flights with more than 50% capacity. As a result, it made flight tickets expensive for consumers and prevented people from choosing air travel.
Therefore, the legislation allowed new airline companies to be able to enter the market more easily, which increased competition and made fares more affordable for consumers.
Example of Deregulation in the Energy Sector
The intention of deregulation in the energy sector was also to lower the prices that consumers needed to pay by increasing market competition.
However, many utility companies operated in a monopoly and they feared that removing barriers to entry meant that they would lose the monopoly power that they held.
Eventually, the attempt to deregulate energy companies ended after a particular company was found to be involved in financial wrongdoings.
Thank you for reading CFI’s guide to Deregulation. In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful: