Definition: Deregulation is when the government reduces or eliminates industry restrictions to improve the ease of doing business. The government removes a regulation when businesses complain it interferes too much with their ability to compete, especially with foreign companies. However, consumer groups also prompt deregulation by pointing out how industry leaders are too cozy with their regulatory authorities.

Deregulation occurs in one of three ways. First, Congress can vote to repeal a law. Second, an agency can remove the regulation, usually under an Executive Order. Third, the agency can simply stop enforcing the regulation.

Pros

• Allows more innovation from small, niche players.
• Allows the free market to set prices. Often prices drop as a result.
• Businesses in regulated industries controlled their agencies, and created monopolies.

Cons

• Allows asset bubbles to build and burst, creating crises and recessions.
• Prevents industries with huge initial infrastructure costs, like electricity and cable, to get started. 
• Exposes people to fraud and excessive risk-taking by companies that will do anything to gain higher profit.
• Social concerns are lost. For example, businesses will ignore damage to the environment since the costs aren't absorbed by the company.
• Rural and other unprofitable populations are underserved.

Example: Banking Deregulation

Financial regulations protect investors from financial risk and fraud.

In the 1930s, Glass-Steagall prohibited retail banks from using deposits to fund risky stock market purchases. 

In the 1980s, banks sought deregulation to allow them to compete globally with more profitable financial firms. In 1999, they got their wish when Glass-Steagall was repealed by the Gramm-Leach-Bliley Act. The banks promised to only invest in low-risk securities, which would diversify their portfolios and actually reduce risk for their customers. Instead, traditional banks like Citigroup invested in risky derivatives to increase profit and shareholder value.  

Foreign countries blame these lax U.S. banking regulations for the global financial crisis. In 2008, the G-20 asked the U.S. to increase regulation of hedge funds and other financial firms. The U.S. refused, saying deregulation was needed to allow companies to compete globally. 

Two years later, the G-20 got several things it had asked for when Congress passed the Dodd-Frank Wall Street Reform Act. First, it required banks to hold more capital to cushion against large losses. Second, it included strategies to keep companies from becoming too big to fail, (like insurance giant AIG). Third, it required that derivatives be moved onto exchanges for better monitoring.

Example: Energy Deregulation

In the 1990s, state and federal agencies considered deregulating the electric utility industry to allow competition. They thought it would lower prices for consumers. Most utilities fought it. They had spent a lot to build generating plants, power stations and transmission lines, and they still had to maintain them. They didn't want energy suppliers from other states to use their own infrastructure to compete with them for customers.

Many states deregulated anyway, mostly on the east and west coasts that had the population density to support it. However, fraud occurred with a company called Enron. This essentially ended any further efforts to deregulate the industry. Enron's fraud also hurt investors' confidence in the stock market, leading to the Sarbanes-Oxley Act of 2002.

Example: Airline Deregulation

In the 1960s and 1970s, the airline industry was tightly regulated by the Civil Aeronautics Board. It managed routes and set fares, guaranteeing a 12% profit for any flight that was at least 50% full. As a result, airline travel was so expensive that 80% of American had never flown. In addition, it took a long time to get new routes, or really any changes, approved by the Board.

The Airline Deregulation Act solved this problem on October 24, 1978. The only part of the industry remaining regulated was safety. Competition rose, fares dropped, and more people took to the skies. Over time, many companies that could no longer compete were merged, acquired or went bankrupt. As a result, just four airlines (American, Delta, United and Southwest) control 85% of the U.S. market, creating a near-monopoly.

As a result, deregulation has led to some problems. First, small and even mid-sized cities such as Pittsburgh and Cincinnati, are underserved. It's just not cost-effective for the major airlines to keep a full schedule. As a result, smaller carriers serve these cities, at a higher cost and less frequently. Second, airlines charge for things that used to be free, such as changing a ticket, meals and luggage. Third, flying itself has become a miserable experience, with cramped seating, crowded flights and long waits. (Source: The Economist, Is Airline Deregulation Bad? August 20, 2013; Huffington Post, Airline Deregulation, December 13, 2013) Article updated September 12, 2014