A Historical and Economic Perspective
Chapter 2: Economic regulation in the transportation industry
Given the kind of assets that are associated with the transportation industry, namely long-life physical infrastructure, the impacts that the industry has in the local, regional and national economies, and other issues such as equity and social justice, the transportation industry has long been the subject of various forms of economic regulation and deregulation. This chapter will provide an overview of general issues regarding the economic regulation of the transportation industry, including an analysis of the airline and airport industry. A market under perfect competition would have, among other characteristics, no barriers to entry, perfect information, no transactions costs, well defined property rights, no externalities and such a number of buyers and sellers that prices would equal marginal costs. Marginal costs, in their turn, would equal marginal revenue. However, there are markets in which one or several of these assumptions do not hold true. Those markets are said to experience market failures. When the production costs in a market are such that, due to economies of scale and/or scope, the lowest cost of production for the entire industry is achieved by having only one firm supplying the market, the market is said to be a natural monopoly. When that natural monopoly exists (or is believed to exist), the rationale to justify the application of economic regulation has been that, without it, monopoly prices would be imposed, leading to a decrease in social welfare.
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