Regulation, Deregulation, and Economic Efficiency: The Case of the CAB

The current wave of deregulatory enthusiasm makes it easy to forget that the creation of the Civil Aeronautics Board (CAB) and its regulatory authority was itself a result of the political and economic forces which prevailed a relatively short time ago. It is tempting to argue that deregulation repr...

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Bibliographic Details
Published in:The American economic review 1980-05, Vol.70 (2), p.311-315
Main Author: Panzar, John C.
Format: Article
Language:English
Subjects:
Aeronautics
Air transport
Airline deregulation
Airline industry
Airlines
Aviation regulation
Civil aeronautics board
Deregulation
Economic efficiency
Economic regulation
Economics
Efficiency
Environmental regulation
Industrial regulation
Natural monopolies
Price regulation
Regulation
Regulatory Intervention in Historical Perspective
Regulatory reform
Regulatory theory
United States
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Summary:The current wave of deregulatory enthusiasm makes it easy to forget that the creation of the Civil Aeronautics Board (CAB) and its regulatory authority was itself a result of the political and economic forces which prevailed a relatively short time ago. It is tempting to argue that deregulation represents a triumph of the public interest over the special interests which presumably were responsible for the formation of the CAB cartel. This would be a serious oversimplification, because: 1. it is possible to view the Civil Aeronautics Act (CAA) of 1938 as a response to a potential market failure then, 2. deregulation may give up the possibility of achieving optimal, first best resource allocation now, and 3. regulatory machinery which could have been used to pursue either economic efficiency or cartel profit maximization clearly did neither.The concept upon which the argument presented is largely based is that airline markets are, even today, more accurately described as being structurally contestable rather than competitive. It is proposed that the difference between public policy toward imperfect airline markets in the 1930s and the 1970s resulted from the interplay of 3 basic forces: 1. a change in public attitude, 2. the increase, due to market growth, of the efficient number of firms in most markets from one to 2 or more, and 3. the basically contestable nature of airline markets.
ISSN:0002-8282
1944-7981