Transportation and Liberalization Definitions, Issues, and Trends

Regulation and Public Ownership Through the 1970s government policy toward transport summarized as: 1. Interest in protecting customers and employees by using quality and safety controls 2.Controlling quantity of services 3. Controlling price of services 4. Regulating entry of new transport operators

Forces for Change 1. High costs of regulation 2. New ideology- regulators pursuing self interests, e.g. creating contestable markets 3. Inflation and economic depression posed problems 4. Demonstration effects from elsewhere showed that deregulation revealed no disastrous effects

A Glossary Deregulation-removal or weakening of legal controls permitting more free exercise of market forces Privatization-allowing private sector to assume control of enterprises Structural Adjustment- series of economic policies designed to reduce the role of government in an economy and increase market incentives

Forms of Privatization 1. Charging - where there is partial or total replacement of subsidy provision by forcing users to pay a more economic or market rate— user bears more of the actual cost 2. Contracting Out- services still funded by public sector but are being provided under contract –after open competition-by private firms 3. Denationalization-where there is a transfer of state-owned enterprises into the private sector

Deregulation in U.S. Transport Railroads-1976 Airlines Motor Carriers Buslines- 1982

Intentions of Airline Deregulation Make airlines more competitive Offer larger reductions in average fares Provide new lower fare and quality options Be more efficient Force airlines to reconsider undertaking cost inflating operations Develop more efficient networks: hub and spoke Eliminate severe financial distress

Theory of Liberalization Theory of Contestable Markets (Baumol) suggests that entry into transport market of new operators is key to efficiency and welfare maximization Regulation responsible for increasing prices by limiting competition Contestable markets are those in which entry is free and exit is costless Used to underpin ideological moves to deregulate and privatize Theory challenged as outcome of liberalization has been oligopolistic control instead of competition

Consequences of Liberalization Differed widely across various modes Why? 1. Variations in external market conditions 2. Depression followed 1978 Act 3. Air traffic controllers strike 4. Interactive effects between modes- trucks compete with rail 5. Effects on fares and freight rates? 6. Changes in structure: no frills carriers, hub and spoke networks 7. Social regulation-safety suffered?