Deregulating the Bus Industry.

In its Buses White Paper, the British Government sets out its proposals for abandoning quantitative control of entry to and provision of local bus services. The logic on which the proposals are based can be reduced to four propositions:-

(i) Deregulation will produce a competitive market.

(ii) Competition will substantially reduce costs.

(iii) A competitive market will improve resource allocation.

(iv) A competitive market will not cause any significant undesirable spin-off effects.

Each of these propositions is suspect.

If there is any competition on bus routes, it will tend to be small group rather than large group. Active rivalry involving schedule matching and price wars may occur, as may collusion. Neither will produce efficient results.

Even if a competitive result were to obtain, the resulting resource allocation would not be socially efficient. A first best optimum requires subsidies because the market is subject to external economies (the Mohring effect). If Government budget constraints operate, the second-best solution then requires cross-subsidies. Competition is not compatible with social efficiency in either of these cases. Nor will the competitive market solution optimise load factors. Quality competition, in the form of minibuses 'creaming' the best traffics, may also be socially undesirable.

The White Paper authors underplay the significance of these resource allocation arguments, while exaggerating the likely impact of deregulation on cost efficiency. Even though some cost savings may be available they could be obtained anyway under a regime of competitive tendering for profitable as well as unprofitable routes. Competition for the market rather than competition in the market is required.