Deregulation - Term Overview

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Deregulation is the process of reducing or eliminating the rules that control an economic activity in order for market forces to determine the balance between supply and demand.

Deregulation is based on the idea that the market is the most efficient mechanism for allocating resources, so barriers to entry or exit and other restrictions on competition should be eliminated.

In addition, regulation has significant disadvantages, which is why it's believed that it should only have a subsidiary role, that is, act only when effective competition isn't possible.

Disadvantages of regulation

The main disadvantages of regulation are the following:

- The regulatory process is expensive: Regulating involves incurring high costs of time and resources. For example: having a team of economists studying the market, developing and applying regulations, supervising, sanctioning, etc.
- Regulation can have undesirable consequences: No matter how skilled regulators are, relationships in markets are complex, so regulation can have unsuspected consequences. For example, regulating the price of a product can reduce its offer and harm consumers.
- Does not generate incentives for efficiency or innovation: Regulated companies that don't face competition don't have incentives for efficiency or innovation. When companies are protected from competition, they don't face the true costs of low productivity or wasted resources.
- It doesn't adjust to dynamic environments: Regulation can delay the necessary adjustment of companies to changes in the market, be they technological, demand or other. Regulation can introduce rigidity and lack of adaptation.

Examples of deregulation

Examples of deregulation are the abolition of price controls, including the minimum wage, import permits and tariffs, subsidies to sectors and companies, or monetary controls.

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