A Historical and Economic Perspective
Transport Economics, Management and Policy series
Chapter 1: Regulation: theory and practice
This work is part of a long academic tradition of the study of economic regulation and its effects in the economic efficiency of an industry. This chapter will provide some background on the theoretical issues regarding economic regulation and the practical applications of some concepts. This chapter does not intend, however, to be a comprehensive study on the theory of economic regulation. It should be regarded as an overview of concepts, with a focus on the aspects that are most relevant to the transportation sector in general and the aviation industry in particular. The interested reader will find a much more complete analysis in other works, including the ones that are referenced and listed at the end of this book. The chapter starts with a quick outline on the rationale for economic regulation. The next section presents the work of two major schools of thought in the current regulatory paradigms: Alfred Kahn and the authors of the Chicago School. Since theory cannot work without practical means of application, in section 1.3 a few regulation mechanisms are discussed. Finally, some conclusions are drawn. Economic regulation has been seen as the ‘government’s necessary and beneficial response to market failure’ (Coppin and High 1999, p._8) to ‘induce firms … to act in a way that is compatible with social goals’ (Train 1991, p. xi). Translated into simpler words, economic regulation is used to maximise social welfare.