ASi" kUCTURE FlOR DEVELOPMENT

government-owned subway system began opera- that can contest the market limits the risks of mntion,
large buses became less profitable, and the rate nopoly abuse. The implication is that, absent comof
return that had formerly been guaranteed to bus pelling arguments to the contrary, all new entrants
companies by regulation became univiable. Efforts should be allowed to provide services, with the
to maintain the rate of return by raising fares on market deciding how many providers can operate
large buses caused passengers to abandon bus profitably. Potential competition is most effective
transport, leading to taxi shortages, overuse of cars, where new entrants tave limited sunk costs of marand
continuing congestion. ket entry-that is, when entrants.can recover their
Thus, when substitutes are available, regulation investments by selling their assets if they decide to
can have especially perverse effects. To shore up re-. pull out of the business. Technological change and
turns in tlte regulated sector, regulators often ex- easing of regulatory constraints are permitting
tend their reach to sectors in which natural monop greater contestability
oly elements are weak. It -is far better in these ' Much of the experience with direct competition
crcumstances to allow the competition from sub- in infrastructure is relatively new, but the results
stitutes to discipline the conduct of the alleged validate the benefits of competition. Systematic evimonopolisL
dence of efficiency gains from greater competition
Co*petitin i. i.frastructe .narket- '.
-comes mainly from the United States, which, after
CoipeStitioi in inJimtruicture tiMarkets
years of regulation, has introduced a number of
Although infrastructure markets with nurnerous major deregulatory initiatives over the past two
suppliers are rare, competition among a few rival decades. In virtually all sectors, greater competition
providers can lower costs and prices. The thieory has led to. lower prices or better services for conof
contestable markets says thtat even where suiners-while efficiency gains and new technoloeconomnies
of scale and scope favor a single gies or business practices have led to sustained profprovider,
the existence of potential rival suppliers itability (Box 3.2).
Box 32
Regulatory cycles in the United States
With its long history of private infrastrcture provision, timate, 17 percent of the U.S. gross national product
the United States exemplifies the changes in regulatory (GNP) in 1977 was produced by fully regulated indugoals
and implementalion and the ensuing cycles in reg- tries; by 1988, this proportion had declined to 6.6 perulatory
poliy. In the late nineteenth century and well cent as large parts of the transportation, communicainto
the early part of the twentieth centur, much compe- tions, energy, and financal sectors were freed of
tition prevailed, especially in electric power and economic regulationL Greater operational freedom and
teleconnmunications. - competitive threats stimulated service providers to
An early instance of economic regulation-the Inter- adopt new marketing, technological, and organizational
state Commnerce Act of 1887-was concerned with mo- practices. The evidence from the United States points to
nopoly power in railway operations. The bounds of substantial economicgains from deregulation, as shown
economic regulation were extended gradually, btut espe- in Box table 32-
cialy during the 1930s and the Great Depression, to virtually
all infrastructure sectors and to other areas of pub- Box table 32 Estited gains from competition
lic interest (for example, creating service obligations and through deregulation of infrastructur sectors
information disdosure requirements). - - the United Sttes
Delivery of infrastructure thus came to be based on a
Fslimotdal niame
particular social compact The service provider was typi- ExStof ga fiun dutio
cally provided with exdlusive rights to specific markets, -Seo dgnuFalion (billions of 1990 U.S. dollars)
and, in return, the government took on the public re- Airlines Complete 13.7-19.7
sponsibility of ensunng that service obligations were ful- Tmrcing, Substantial 10.6
filled at easonable and just" prices. Inflationary pres- Railroads Partial 10.4-12.9
sures of the early 1970s caused regulators to intervene Telecom- Substantial 0i7-1.6
even more heavily in the operations of service providers. munications
Health, safety, and enviromnental regulation also gained Natural gas Partial Substantial gains
momentum around this time
to consumers
Public dissatisfaction with regulatory outcomes re- NetlcGains troi compefition cover netguinstoproducess(in teris of
profits), consumers (pdiCCS and service quality), and industbv emnploysuited
a move to reduce economic regulation in many ees(wagesandemployment).
sectors in the late 1970s and 1980s. According to one es- Suture Viscsi, VerneRand Harrington 1992; Winston 1993.
57