ECONOMIC

incentives for technological improvement and innovation. Fourth, the uncertaintyintroduced by the regulatory process itself will cause resources tobe used in unproductive ways. Finally, if price controls lower the expectedreturns to new capital investment, capital formation will be retarded andthe economy will grow more slowly.The effects of regulation on supply can be organized into three categories:cases where the regulated price exceeds the long-run free-marketprice; cases where the regulated price is less than the long-run competitivemarket price; and cases where regulation increases the costs of production.Regulation reduces the flow of output from the regulated industry in all threecategories.REGULATED PRICE ABOVE MARKET PRICEIn a number of instances a government-dictated price has been establishedat a level exceeding the free-market price. This situation might arise froma public effort to ensure profitability and encourage investment in a newindustry. Or it might develop from a private industry's securing legislativeprotection against "unfair" price competition from another industry producinga substitute product. Or it could occur when regulation prevents relativeprices from responding to changes in supply or demand conditions.Regardless of the circumstances which bring about the excessive price, governmentprice control can develop into a legal and enforceable means ofattaining the goals of a private cartel.The establishment of a higher price is usually accompanied by restrictionson entry or output as well. When a regulated price is higher than the freemarketlevel, existing producers seek to expand output and new firms areattracted to the industry by the prospect of high profits. Alternatively, anexcessive price may deter the withdrawal of firms and production capacityfrom an industry with declining demand. At the same time, consumers confrontedby increased prices restrict their purchases. Because firms offer alarger supply than consumers wish to purchase at the regulated price, pressuresare generated for the regulatory authority to limit entry and restrictexpansion of output in order to protect the profits of the existing producers.Restricting entry, however, will not necessarily result in higher profit rates.The higher expected profits per unit of sales encourage each firm to try toincrease its total sales by using nonprice methods of competition, such asadvertising and quality competition. Because these activities are costly, profitsare dissipated. Under such circumstances competition leads to highercosts because price competition is precluded. Consumers may derive somebenefits from such nonprice competition, but they are denied the opportunityto choose among alternative price-quality options, as they can in the freemarket, and thus are made worse off.Motor CarriersTrucking provides a good example of the economic costs of regulationsthat hold prices above the free-market level. In interstate trucking an anti-148