Deregulation of Markets

Usually, governments are in charge of laws and regulations and they try to keep tight control. However, sometimes governments might decide to relax or completely get rid of certain regulations in a particular market. Why would they do that? In this explanation, you will understand why governments deregulate markets and the advantages and disadvantages of a deregulated market.

What is a deregulated market?

In a general sense, deregulation is all to do with the removal of legislation and laws imposed by the government. In economics, this happens in the context of markets.

Advantages of market deregulation

Sometimes, a government will choose to deregulate specific markets. Some advantages of a deregulated market are:

• Economic growth. By deregulating markets, the government stimulate economic growth because firms are now able to conduct businesses as they deem fit making themselves as efficient as possible. Being more efficient can increase productivity and output in an economy, thus leading to economic growth.
• Lower prices. Deregulation can promote competition in a market as there are no barriers to entry. More firms will enter the market. With more firms in a market, this translates to lower prices for consumers and this increases their consumers surplus.

• Increased customer choice. When the government deregulates a market, there are reduced barriers to entering the market. This allows firms to enter without worrying about many costs. The increase in the number of firms in the market gives consumers more firms to choose from.
• More freedom. With the removal of regulations, firms and consumers have room to decide how they conduct business. Sometimes, restrictions harm the development of firms and with their removal, they are free to make decisions on their own.

Disadvantages of market deregulation

The deregulation of markets does have some disadvantages. Some of them are:

• Lower standards. Regulations ensure that firms do not produce goods and services that are below a certain standard. However, with their removal, the competitive nature of the market will encourage businesses to lower standards to attract unsuspecting customers.
• Market failure. The deregulation of markets can lead to market failure as firms are no longer regulated by certain standards and this can encourage them to take more risks.

• Monopoly power. With the removal of government restrictions, small businesses are bound to be driven out of the market by large established companies that create monopolies to control the market.

Examples of deregulation of markets

There are many examples of deregulation around the world. Some of these examples are:

• Airline deregulation in the US. In 1978, the US government deregulated the airline industry allowing for an increase in competition. This resulted in a 33% decrease in the prices of tickets and helped lower costs airlines and smaller airports.¹
• Mail delivery deregulation in the UK. In the UK, the Royal Mail had a legal monopoly on delivering letters and parcels and it didn't have competition. But in 2006, the market was deregulated and competition was allowed.
• The energy sector in the UK. The energy sector in the UK was deregulated in 1986. It was under Margaret Thatcher that the government decided to sell off the British Gas Corp. British Gas remained a whole combined monopoly provider of gas after being privatised. However, British Gas was not allowed to charge what they liked for their gas. The company was supervised by the Office of Gas and Electricity Markets (Ofgem) to protect consumers against abuse.

Deregulation under Thatcher's government

Margaret Thatcher was an advocate for the free market and many of her economic policies involved the privatisation and deregulation of markets.

Let’s study one example of deregulation and privatisation during Thatcher’s government and some of its economic impacts.

Big Bang: deregulation of financial markets

The 'Big Bang' here refers to the deregulation of the London Stock Exchange (LSE). Deregulation allowed for free-market competition in the financial markets and caused London to become a major European centre of finance.

There were three key components of the Big Bang:

1. Abolishing minimum fixed commissions on trade. This allowed for more competition.
2. Ending the separation of dealers and advisors. This allowed for more mergers and takeovers.
3. UK brokers could be owned by foreign firms. London could now operate in foreign markets. ²

The Big Bang produced a ‘free for all’, which caused many big banks to take over smaller ones. Some UK banks were bought up by larger European, American, or Japanese banks. This projected the narrative that these larger banks were ‘too big to fail’.

The volumes of trades had significant increases after the deregulation policies Thatcher introduced and the costs for these firms were reduced.

The deregulation policies not only impacted the financial market but also changed London’s geography. Many banks were now around a 10-minute walk away from each other and, importantly, from the Bank of England.

Initially, many people benefited from the deregulation of the financial markets. But there were many dangers ahead. For example, a Conservative minister, David Willets, expressed concern and the potential dangers of the Big Bang saying that the financial market could lead to a ‘boom and bust’.

The narrative that these large banks were 'too big to fail' and their unethical behaviours, laid the groundwork for the 2000 Dotcom Bubble and the 2008 Financial Crisis.