Using Competition as a Guide
"The performance of the railroad industry since 1980 provides a vivid illustration of the benefits of regulatory reform. Productivity has leaped upward, rail rates have fallen somewhat in real terms, and the 50-year decline in the railroads' share of traffic has finally come to an end. Returns to capital have risen and investment has responded, arresting the deterioration in railroad capital and service quality. This has been made possible by eliminating many of the destructive regulations that controlled the railroad industry during this century and by reforming the regulations that remain.
The goal of the new regulatory system is to promote competition where it is present and to simulate competition where it is absent. Rail rates, for example, are no longer regulated unless there is evidence of market power on the part of a carrier. In such cases, rates are regulated under a system known as 'constrained market pricing,' which attempts to duplicate the outcomes of competitive markets. While the curtailment and reform of rail regulation are by no means complete, the accomplishments to date are truly remarkable.
The history of rail regulation contains important lessons for the regulation of other industries. The old regulatory system failed to handle the central regulatory problem arising in railroads and certain other major industries; the mixture of competition and monopoly elements in supply. The new regulatory system is a creative solution to this problem and provides a valuable model for regulatory reform in such industries as telecommunications, electric power, postal services, and gas pipelines."
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