Living in a Second-Best World

Department of complaints.
June 26 1998 3:30 AM

Living in a Second-Best World

We disgruntled telephone and airline users are victims of a theory that doesn't apply.

(Continued from Page 1)

Of course, no markets are really perfect in this imperfect world, and you want to be careful not to let suppliers exaggerate the constraints to buttress an unwarranted case for de facto or legislated monopoly. But second-best situations abound, and here's the upsetting thing that economic theory tells us about them: In the world of the second best it is not guaranteed that a move toward eliminating the market imperfections will make the market more efficient. In such a situation, for example, cutting regulations and increasing competition might make consumers better off--or it might make them worse off. There are no guarantees.

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This, of course, is not a very satisfactory state of affairs for theoretical economists--or, for that matter, policy-makers or speech writers. It means that instead of blandly assuming less regulation is better than more or more competition is better than less, you have to study the specifics of each case very carefully. And you have to keep experimenting with alterations and examining the results as external conditions change over time. And this can be very tiresome for everyone involved.

So I can't tell you if deregulating utilities will necessarily lead to lower-cost, more efficient electricity service. Or whether the recent move to consolidation among the regional companies created in the federal breakup of AT&T will make telephone service better or worse. But, a priori, neither can anyone else.

Jodie T. Allen is the senior editor at the Pew Research Center.

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