4. Deregulation and the Cost of Trucking. Suppose the government initially limits the number of trucking firms that can haul freight. The market for truck freight is served by a single firm that produces five million ton-miles of service per year, where one ton-mile is the hauling of one ton of freight one mile. The newly elected governor has proposed that other firms be allowed to enter the market. At a public hearing on the issue of eliminating the entry restrictions, the manager of the existing firm issued a grim warning: If you allow entry into the market, four or five firms will enter, and the unit cost of truck freight will at least triple. There are big economies of scale in trucking services, so a single large firm is much more cost-efficient than several small firms would be. What s your reaction to this statement?
Economies of scale are slight. Unit cost will rise, but not by much.
My reaction to this statement is that while it is true that there are economies of scale in trucking services, allowing other firms to enter the market does not necessarily guarantee that the unit cost of truck freight will triple. This is because the entry of new firms can result in increased competition, which can lead to market efficiencies and potentially lower costs for consumers.
To further investigate this claim, you can analyze the relationship between the number of firms and the cost of trucking. One approach is to look at historical data or studies that examine the impact of deregulation in other industries. By comparing the costs before and after deregulation, you can gain insights into the potential effects on the trucking industry.
Additionally, you can examine the experiences of other countries or regions that have already undergone deregulation in the trucking industry. This can provide real-world examples of the outcomes of allowing multiple firms to enter the market.
It is important to consider multiple perspectives on this issue. While the existing firm may argue against deregulation due to potential cost increases, other industry stakeholders, such as consumers and potential new entrants, may have different views based on their interests.
Ultimately, the answer to whether allowing entry into the market will triple the unit cost of truck freight depends on various factors such as market conditions, competition, and the specific regulatory framework in place. Thus, detailed analysis is needed to form a comprehensive understanding of the potential consequences of deregulation.