Government and the Macro‑economy – Supply‑Side Policy
Topic: Deregulation
Learning Objective
Students will be able to explain what deregulation is, identify the main types of deregulation measures, evaluate their advantages and disadvantages, and assess their likely impact on macro‑economic variables such as output, unemployment and inflation.
1. What is Deregulation?
Deregulation is the removal or simplification of government rules, licences and standards that restrict the way firms operate. The aim is to increase competition, lower costs and encourage innovation, thereby shifting the long‑run aggregate supply (LRAS) curve to the right.
2. Rationale for Deregulation
Reduces compliance costs for businesses.
Encourages entry of new firms, increasing competition.
Stimulates investment and productivity growth.
Can lead to lower prices for consumers.
3. Main Types of Deregulation
Removal of Licensing Requirements – e.g., eliminating the need for a licence to start a small retail shop.
Relaxation of Price Controls – allowing market forces to set prices for goods and services.
Reduction of Administrative Burdens – simplifying tax filing, reporting standards and health‑and‑safety inspections.
Opening Up of Previously Protected Sectors – allowing competition in utilities, telecommunications or transport.
4. Expected Economic Effects
When deregulation is successful, the following macro‑economic changes are likely:
Increase in potential output (\$Y_{P}\$) as firms become more efficient.
Shift of the LRAS curve to the right.
Reduction in the natural rate of unemployment (\$u^{*}\$) due to higher labour demand.
Downward pressure on price levels, helping to contain inflation.
5. Advantages of Deregulation
Lower production costs → lower prices for consumers.
Greater consumer choice and product variety.
Stimulates innovation and technological adoption.
Improves efficiency of resource allocation.
6. Disadvantages / Risks
Potential for reduced consumer protection (e.g., safety, environmental standards).
Risk of market failures such as monopolies or oligopolies.
Short‑run job losses in regulated industries while firms restructure.
Possibility of increased inequality if benefits accrue mainly to larger firms.
7. Real‑World Examples
Country
Sector Deregulated
Key Measures
Observed Outcomes
United Kingdom
Telecommunications
Removed monopoly licences; introduced competition among providers.
Prices fell by \overline{30} %; broadband penetration rose sharply.
United States
Aviation (Airline Industry)
Airline Deregulation Act 1978 – eliminated fare controls and route restrictions.
Increase in number of airlines; ticket prices fell; more routes served.
Australia
Financial Services
Reduced licensing requirements for new banks and fintech firms.
Growth in digital banking services; greater competition in loan rates.
8. Diagrammatic Representation
Suggested diagram: LRAS shift to the right after deregulation, showing lower price level (P) and higher real GDP (Y) in the long run.
9. Evaluation Checklist for Students
Identify the specific regulation being removed.
Explain how the change affects costs for firms.
Analyse short‑run versus long‑run effects on output and employment.
Consider possible negative externalities and the role of complementary policies (e.g., competition law).
Use real‑world examples to support arguments.
10. Quick Revision Quiz
What is the primary macro‑economic goal of deregulation?
Give two examples of sectors where deregulation has been implemented.
Explain how deregulation can lead to a reduction in the natural rate of unemployment.
List one potential downside of deregulation and suggest a policy to mitigate it.