LIBERALIZATION WITHOUT DEREGULATION: U.S. TELECOMMUNICATIONS POLICY DURING THE 1980s

During the past 20 years, the U.S. telephone industry has undergone a remarkable evolution from a set of government‐enforced monopolies to a much more competitive environment. Long‐distance service, private‐line service, data communications, and terminal equipment once were available only from the telephone monopolist. Now they are freely available from numerous competitive suppliers due to a series of regulatory and judicial decisions. But despite this veritable explosion in competition, the telephone industry still is regulated at both the federal and state levels. Only the provision of terminal equipment is totally deregulated. Regulating telephone rates has created a highly inefficient rate structure replete with cross‐subsidies. Legislators' and state regulators' reluctance to eliminate these cross‐subsidies remains the most important hurdle to transforming the telephone industry to a fully competitive market. Nevertheless, liberalizing entry has generated some economic efficiencies through its effect on productive efficiency and on regulated rates. Productive efficiency gains may have reached $3 billion by 1988, and the welfare gains from the limited rationalization of rates caused by entry are nearly $1 billion per year. Fully deregulating long‐distance and local service requires that regulators abandon their policies of cross‐subsidizing rural residences at the expense of businesses and of cross‐subsidizing local service at the expense of long‐distance service. Movement toward deregulation is progressing at the federal level and in some states, but full deregulation appears unlikely in the foreseeable future.