The Disadvantages of Deregulation

Jupiterimages/ Images

The government has an interest in regulating some industries, such as telephone, gas, and electric companies, with tougher rules and requirements because they serve so many people as a matter of necessity. Deregulation removes some of the control the government has over these types of industries so that other companies can enter the market and serve customers. The benefits are more efficient service and lower prices, but there are a few disadvantages as well.

Price Decreases

While a price decrease across the board is a positive effect of deregulation for customers, it can have a negative effect on the company that previously controlled the market or industry. In some cases, the business that has been providing services to the community is unprepared for the price competition that ensues when other companies are allowed to enter the market. They may also have to contract their equipment out to these other companies (as is the case with some phone companies), which could be a strain on the company's resources. If the price decreases are not met with more efficient operations and cost-cutting, the investors and employees of the original business may suffer.

Could Degrade Quality

If an industry is deregulated, this will bring competitors to the market. Since with deregulation the government has less of an influence, there is no guarantee that the new competitors will offer a product with similar or comparable quality as the current offering.

Fly-By-Nights—Customers Left “Holding the Bag”

If new companies crop up in an established yet newly deregulated market, this could draw scammers or “fly-by-night” companies. These companies play on the novelty of being able to offer an alternative option to customers who believe that any alternative would be better than what they have now. If the new company goes out of business unexpectedly due to bad business practices or poor products, its customers are left to deal with the negative effects. Each customer may also have trouble going back to the original provider (for example, the customer may have to pay reconnection fees for a gas or electric service).

Most recent