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PrinciplesofEconomics

——byNGregoryMankiw

Principle#1PeopleFaceTradeoffs

Wefacetradeoffseveryday.

Tradeoffsoccurwhenconstraintssuchasbudgetortimeforceustogiveuponethinginordertogetsomethingelse.

Johnisahighschoolseniorfacingatrade-offwhoseoutcomewillhelptoguidethecourseofhislife.Johnistryingtochoosetherightcollege.HisgradepointaverageandSATscoreshaveplacedhimintheupperpercentileofhisclassandhavemadehimaveryattractiveprospectforanycollege.ForJohn,anumberoffactorsdeterminehisultimatechoice.Hehastocomparetheadvantagesanddisadvantagesofeachinstitution.Inthisway,hecanmakeappropriatetradeoffstoreachaninformeddecision.

OnepossibilityforJohnisacommutercollegeclosetohishome.IfJohnchoosesthisschool,hewillliveathomeandhavealowertuitioncost.Eachofthesefactorswillkeeptheoverallcostofhiseducationaffordable.ButJohnhashisheartsetonacareerasanarchitectandthecommutercollegehaslimitedcourseworkinthisarea.

John’snextoptionisaprivateuniversityinanotherpartofthecountry.Thisuniversitywillprovidehimwithadegreeinarchitectureandalsohasaninternationalreputation,onethatwillgiveJohngreatercredibilitywhenheappliestograduateschool.Buttheschoolmayalsobeprohibitivelyexpensive.Also,leavinghomemayprovidefreedombutwillalsobealessstructuredenvironmentthanheisusedto.

Johnhasathirdchoice:astateschool.Thestateschooloffersapossiblecompromisebetweenthecommutercollegeandtheprivateuniversity.ItalsooffersJohnadegreeinarchitecturewherehewillbereasonablyclosetohomeandfriendsandhistuitioncostswillbelowerthantheprivateschool.Buttheprivateschool’sarchitectureprogramhasaninternationalreputationanditsaverageclasssizeismuchsmallerandthereforemorepersonal.

Johnmustnowevaluateeachofthesefactorsbasedonhisownneedsanddesires.

Forexample,John’sfirstpriorityisgettingthebestpossibleeducation.Heknowsthatcompetitionforagraduatedegreeinarchitecturewillbeverystiffandhewantshisbestfootforwardwhenthetimescomes.Hissecondpriorityiswherehelives.Johnwantstostaynearhomewherehecanbenearhisfriendsandfamily.Inthefinalanalysis,though,John’sdecisionwillhavetofirsttakeintoaccounthisbudgetconstraints.

Johnmustnowcomparehisprioritieswithaneyetowardtheseconstraints.AsJohnmakeshistradeoffs,heispracticingoneofthebasicprinciplesofeconomics:There’s

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nosuchthingasafreelunch.Togetonethingthatwewantweusuallyhavetogiveup

somethingelsethatwewant.

Sincehisparentshavetoldhimthattheydonotwanttopayfortheprivateschool,Johnmuststrikeitfromhislist.Hemustnowmakeappropriatetradeoffsbetweenthecommutercollegeandthestateschoolinordertoarriveattherightchoice.

John’snexttradeoffisbetweenthequalityoflifethateachwillofferandthequalityofitseducation.

Johnhasalreadymadetwoimportantdecisions.Hedefines“qualityoflife〞aslivingathomenearfriendswhilehisdefinitionfor“qualityofeducation〞isadegreeinarchitecture.Bycomparingthetwoschoolsonthesebases,Johnisabletoarriveatthebestpossibletradeoff.

Likeallofus,Johnwasabletoestablishhisownpriorities,thendeterminewhichtradeoffswerenecessarytoarriveatthebestpossibleoutcome.

Byunderstandingouroptionsandmakingappropriatetradeofs,wewereabletomakethebestdecisionsforourownlives.

Principle#2TheCostofSomethingisWhatYouGiveUptoGetIt

Women'srolesinoursocietyhavechangedtremendouslyinthelasthundredyears.Thischangehasimpactedtheopportunitycostsforwomenastheyconsiderwhethertoworkinsideoroutsidethehome.

Theopportunitycostofanitemiswhatyougiveupinordertogetit.Similarly,theopportunitycostofanactivityiswhatyougiveupinordertodoit.Yourchoicesdependonopportunitycostswhichinturndependonmanyfactorsincludingmoney,time,andqualityofexperience.

Inearlier,pre-industrialgenerations,womenreceivedmostoftheirsocialprestigefortheirrolesaswifeandmother,whiletheirlaborwasneededliterallytokeepthehomefiresburning.Thekindsofjobsopentothem,ontheotherhand,werelimitedandpaidpoorly.Theopportunitycostofworkingoutsidethehomewasoftentoohightobeworthwhilegiventheimportanceoftheirresponsibilitiesathome.

Asbarrierstowomenenteringcertainprofessionshavefallen,morewomenhavesoughtpreparationforthoseprofessions.In1968,womenreceived8%ofthemedicaldegrees,3%oftheMBAsand4%ofthelawdegreesgrantedthatyear.

By1986,womenwereawarded31%oftheMD’sandMBAs,andaccountedfor39%ofthelawdegrees.Today,thefigurescontinuetoclimb,withwomencomposing43%oflawschoolenrollment.

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Thebroader,morelucrativecareerfieldsopentowomentodayrequirethecarefulevaluationofchangedopportunitycostswhenchoosingwhetherornottoworkoutsidethehome.

Forexample,letusconsideracouplewhocurrentlyworkfulltime,each

making$50,000ayear.whatistheopportunitycostofchoosingtowork?Whatistheopportunitycostofchoosingtostayathome?

Supposethecouplehasachild,andnooptionsforfreechildcare.Theywill

havetopurchaseequivalentchildcarefromababysitter,daycarecenter,orgiveuponeoftheirsalariesandstayhome.Childcarewillrequireanannualcashoutlayof$15,000.

Theyhavelimitedfreetimeeachweek,andfindthathousecleaningrarelygetsdone.Theycanemployaprofessionalhousecleaningserviceorstayhometodothecleaningthemselves.

Theopportunitycostofworkingisthevaluetheyplaceontheirtimeiftheydidnotwork.Oneofthemcouldprovidechildcareworth$15,000andhousecleaningworth$1,200.

Assumingthesearetheonlybenefitsforegonebyworking,theopportunitycostofworkingisthe$16,200.

TheybothhavehighlylucrativejobskillssothefinancialbenefitsofworkingWegetthesameansweryaskingthequestion:“Whatistheopportunitycostofstayingathome?〞Bystayingathome,oneforgoestheopportunitytowork,thusgivingupanincomeof$50,000ayear.Theopportunitycostofstayinghomeis$50,000.

Themonetarybenefitofstayingathometotakecareofthehouseholdtasksandcareforthechildis$16,200.Althoughtherearefinancialbenefitstostayingathome,thesebenefitshavealowermonetaryvaluethantheopportunitycostofforgoingtheirsalary.

Theseconsiderationsreflectimportantaspectsofopportunitycost.Understandably,aspossibilitiesforwomentoworkoutsidethehomehavemultiplied,theopportunitycostsforwomentoremainathomehaveincreased.

Ofcourse,theremaybenon-monetarycoststoworkingthatwehavenotyetconsidered.Oftenaworkerwillturndownovertimeeventhoughitpaysoneandahalftimesthenormalhourlywage.Why?Theworkerplacesmorevalueonfreetimethantheextra50%theemployerisoffering.

Thisnon-monetaryopportunitycostishardertomeasure.Ifitwerestrictlydollarsand

cents,ourcouple’sdecisionwouldbeeasy.

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Buttheybothplaceagreatdealofvalueonthequalityoflifefortheirchildandtheybothlovethetimetheyspendwiththeirchild.Sotheopportunitycostofworkingmaybemuchhigherthanthefinancialcostof$16,2000.

In1979,thehourlyearningsofwomenwereonly62%ofthewagesearnedbytheirmalecounterparts.By1992,thatpercentagehadrisento74%

Aswomen’ssalariesbecomecomparabletomen’s,theopportunitycostforwomenstayingathomehasbecomeclosertotheopportunitycostformen.

Thedecisiontostayhomewiththechildrenisnolongerthesoleresponsibilityofthewoman.

Asmenandwomenreassessthechangingnatureofworkbothinsideandoutsidethehome,theirshiftingprioritieswillgivethemanewunderstandingofopportunitycostandhelpthemfindanewbalancebetweenfamilyandcareer.

Principle#3RationalPeopleThinkattheMargin

Rayisconsideringaverytemptingoffer.Afewweeksback,Rayheardthathisfavoritebandwascomingtotown.Hewassoexcitedhewaswillingtospendtwenty-fivedollarsforthebestseatinthehouse.

Hekeptcallingtheboxofficebuttheoverwhelmingnumberofcallersmadeitnearlyimpossibletogetthrough.Whenhefinallydid,hehadtosettleforatendollarticketintherestrictedviewsection.

Now,onthenightoftheconcert,RayisapproachedbyScott,aticketscalper.ScottwishestosellRayatwenty-fivedollartickerwithandunrestrictedviewfortwentydollars.

HowwillRaymakethisdecision?Notbysaying,“No,becauseIalreadyhavea

ticket,〞or“Yes,becauseit’sagoodticket.〞Hewillapplytheprinciplesofmarginalthinking.Raywillweightheincrementalbenefitsofeachchoiceinlightofincrementalcosts.

Raymustdetermineifthemarginalimprovementinhisseatwilljustifytheaddedexpense.Inordertodothis,hewillanalyzethemarginalbenefitofthebetterseat.Inotherwords,Raymustaskhimselfifabetterseatisworthtwentydollarstohim.

Ray’sanalysistellshimthatthemarginalbenefitofabetterseatisthathewillenjoytheconcertmuchmore.Therefore,themarginalimprovementoverhisoriginalseatjustifiestheadditionalexpense.Rayquicklyacceptstheoffer.

ThisisclearlyagooddealforRaybutwhataboutScottthescalper?Surelyhecan’tmakeprofitsellingtwenty-fivedollarticketsfortwentydollars,canhe?

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Assoonastheywentonsale,Scottpurchasedfiftyticketsattwenty-fivedollarseach.Thisgavehimatotalout-of-pocketexpenseofonethousand,twohundredandfiftydollars.Hewasgamblingthathecouldselltheseticketsataprofit.

Sureenough,whenScottarrivesatthestadiumthreehoursbeforeshowtime,hefindsdozensofdisappointedfanswillingtopaymorethanfacevalueforhistickets.Hequicklysellsthirtyticketsatfortydollarsapiece.Thismakesbackonethousandandtwohundreddollarsofhisoriginalinvestment.

Afterthefirsthour,though,Scottexperiencesasharpdeclineinsalesandhefindsthathecannolongersellticketsabovefacevalue.Duringthenexthourandfortyminutesheisonlyabletoselltentickets,allattheirfacevalueoftwenty-fivedollars.DidScott’sgamblepayoff?

Thistwohundredandfiftydollars,whenaddedtohisfirsthoursalesgiveshimatotalofonethousand,fourhundredandfiftydollars.Scottnowhasatwohundreddollarprofitonhisoriginalonethousand,twohundredandfiftydollarinvestment.However,Scottnowwisheshehadonlyboughtfortytickets.Hestillhastenticketsleftattwentyminutestoshowtime.Whatshouldhedowiththesetentickets?

Sincehe’srecoupedhissunkcost,Scottrealizesitsbettertosellthemforsomethingratherthannothing.Hehowofferstheremainingticketsfortwentydollarsapieceandfindsseveralwillingbuyers,includingRay.Eventhoughhe’stakingalossontheselasttickets,marginallyhe’sbetteroffsellingthematthatpriceratherthanthrowingthemaway.

RayandScottarenottheonlywinnersinthistransaction.Kimisanotherfan,onewhoiswillingtogamblethatScott’spricewillcomedownevenmore.ByfiveminutestoshowtimeScotthassoldallbuttwoofhisremainingtickersfortwentydollars.Scottnowhastotalsalesofonethousand,fivehundredandthirtydollarswhichgiveshimaprofitoftwohundredandeightydollarsoverhisoriginalonethousand,twohundredandfiftydollarinvestment.

AssoonasScottisdowntotwoticketsandthere’snotimeleftbeforethestartoftheshow,Kimmakeshermove.KnowingthatScottdoesn’twanttobewithticketssoclosetoshowtime,Kimoffersthescalperfivedollarsforthefinaltwo.SinceScotthasnothingtoloseandtendollarstogainbyunloadingthelasttwotickets,theymakeadeal.

Astheconcertbegins,RayisabletogetabetterseatandScottisabletomaximizehisprofits,allbyapplyingtheprinciplesofmarginalthinking

Principle#4PeopleRespondtoIncentives

Formanypeople,graduationfromhighschoolisanexcitingtime,filledwithrenewedpossibilitiesandchallenges.Somewillchoosetodirectlyenterthework-force.Otherswilldecidetocontinuetheireducationbyattendingcollege.Inevitably,thedecisionwillbeaneconomicone.

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Whenfinancialresourcesarelimited,peoplemustconsiderthepricesofgoodsandservicestheywishtopurchase,includingthepriceofacollegeeducation.Andbecauseofbudgetconstraints,theyoftenfacetradeoffs.Atatimelikethis,peopleareverypronetorespondtoincentives.

AlanandSarah,tworecenthighschoolgraduates,areperfectexamplesofhowincentivescanaffectchoices.Bothhavedecidedtoattendcollegeimmediatelyaftergraduation.

Sarah’sfamilyhassavedfifteenthousanddollarsfortuitionatoneofthefinestprivateschoolsinthecountry.Alan’sfamilyhassavedseventhousanddollarsforcollege,andheplansonattendinghisstateuniversity.Thenextstepisforthemtofigureoutthemosteffectivewaystofinancetheireducation.

Alandiscoversthatthecostoftuitionatthestateschool,plusotherexpenses,ishigherthanhehadanticipated--tenthousanddollarsayear.

Hecouldpostponehiscollegeplansandgetajobtohelppayforhistuition.Buthemightonlybequalifiedforlow-payingjobs,whichwouldgreatlyreducehissavingpowerforcollege.

InSarah’ssituation,thecostofprivateschoolingismuchhigherthanshehadthought.Withthecostbeingtwentythousanddollarsayear,shehastochooseherstateuniversity.

Intimeslikethese,peoplelikeAlanandSaraharelookingforbetteroptions.Thegovernmentcanpossiblyhelpthembyofferingincentives,suchasatuitiontaxcredit.Atuitiontaxcreditisadeductionoffthetaxowedonaperson’staxreturn.

Forexample,ifthetaxcreditisthirtypercent,thefamilycandeductthirtypercentofthetotalcostoftuitionfromthetaxesowedontheirtaxreturn.Inthecaseofacollegetuitiontaxcredit,theincomeisdesignatedtopayfortuitiononly.

Giventheintroductionofacollegetuitiontaxcredit,Alanisnowabletoaffordstateuniversitydirectlyaftergraduation.Theannualcostofattendingtheuniversityistenthousanddollars.Hecanusehisparents’seventhousanddollarsandaddthemoneyfromthethreethousanddollartaxcredittopaytheremainder.

AtuitiontaxcreditwillalsoenableSarahtoattendtheprivateschoolsheoriginallychose.

Tuitionforthatschoolistwentythousanddollarsayear.Withherparents’contrubutionoffifteenthousanddollarsandataxcreditofsixthousanddollarsshecannowaffordtuitionthere.

Manypeoplethinkthatoursocietywouldonlybenefitfromtheeducationthatgovernmentincentivesmakepossible.Butalthoughweknowthatpeoplerespondtoincentives,suchpoliciescanalsocreateunexpectednegativeramifications.

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Forexample,agovernmenttaxcreditincreasesthedisposableincomeofmiddleandupperincomefamilies.Meanwhile,lowerincomefamilies,theonesmostinneedofextramoneyforeducation,arelessaffected.

Collegetuitiontaxcreditcanalsohaveanegativeramificationintheeducationmarketasawhole.Withextramoneyavailable,morepeoplecanaffordtoattendcollege.Inotherwords,the“demand〞forcollegeeducationincreases.

Butittakestimeforschoolstoincreasetheircapacitytoaccommodatetheextrastudents.Mostuniversitieshaveanestablishedsystemwithasetnumberofcampusbuildings,faculty,andadministration.Inotherwords,eventhough“demand〞forcollegeeducationincreases,the“supply〞r(shí)emainsconstant.

Inthissituation,schoolsrespondtotheincreaseddemandbyraisingtuitiontocoverthecostsofaddingclassrooms,dormitories,teachers,andadministrations.Thesemarket-widetuitionincreasesmaypartiallyreducetheeffectivenessoftheoriginaltaxcredit.

Ultimately,incentivessuchastuitiontaxcreditscanhaveapositiveeffectonsociety.But,aswithanygovernmentpolicy,considerationmustbegiventothedirecteffectsaswellastheindirecteffectsthattheincentivescreate.

Policymakersmustfullyunderstandthesedifferingprinciplesinorderfortheincentivestocausethepositiveeffectsonsocietythattheyintend.

Principle#5TradeCanMakeEveryoneBetterOff

Trade.Wedoiteverydayofourlives.Peopletrademoneyforgoods.Sodobusinesses...Andnations...Tradeisthelifebloodofinternationaleconomy.Everynationgrowsstrongeranditseconomyimprovesasitexercisestheprinciplesofinternationaltrade.

Therearetwoelementstoawell-balancedtraderelationship:comparativeadvantageandspecialization.

Economistsusetheterm“ComparativeAdvantage〞whendescribingtheopportunitycostoftwoproducers.Theproducerwhohasthesmalleropportunitycostissaidtohaveacomparativeadvantageinproducingthatgood.

Toseethebenefitofcomparativeadvantage,letusexaminetwocountries,AmericaandJapan,andtwogoods,foodandcars.

Forourexamplewewillassumethatbothcountriesproducecarsandgrowfood.InboththeU.S.andJapan,aworkercaneachproduceonecarpermonth.BecauseAmericahasmorelanditismoreefficientatproducingfoodthanJapan.AU.S.workercanproducetwotonsoffoodpermonth,whereasaJapaneseworkercanproduceonlyonetonpermonth.

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IfAmericaisasefficientasJapanatcarmanufacturingandbetteratfoodproduction,whydoweneedtotradewithher?

BecausetheopportunitycostofproducingacaristwotonsoffoodintheU.S.,butonlyonetonoffoodinJapan.So,JapanhasacomparativeadvantageovertheU.S.inproducingcars.

BecauseitislessexpensiveforAmericatoimportcarsthantoproducethemdomesticallyandmoreprofitabletoexportoursurplusfoodthantotryandconsumeitallinternally,theU.S.hasacomparativeadvantageinfoodproduction.

Oncethiscomparativeadvantagehasbeendetermined,eachcountryrecognizestheneedtospecialize.

JapancannowspendmoretimeproducingcarsandlesstimegrowingfoodwhiletheU.S.canspendmoretimeintheproductionoffoodandlesstimeontheautomobileassemblyline.

Eachcountryisnowspecializingintheproductionofagoodinwhichithasacomparativeadvantage.Inordertoreceivethegooditisnotproducing,itmusttradewiththeother.Thistraderelationshipbenefitsbothpartners.

Sucharelationshipbreedsaninterdependenceamongtradingpartners.

Inmanyways,weasAmericanstendtoviewtheJapaneseasourcompetitorsintheglobalmarketplace.Afterall,webothproduceautomobilesandfoodandarecompetingforthebiggestpossiblemarketshareofeach.

Butisitrighttoviewthiscompetitionasasportscontest,whereonesidewinsandtheothersideloses?

No.Suchalimitedviewtendstoignorethepositivebenefitsofinterdependenttradetobothcountries.Infact,theoppositeistrue:Tradebetweentwocountriesmakeseachcountrybetteroff.

Duringthepastthirtyyears,Japan’scomparativeadvantageandspecializationisthemanufactureofautomobileshasledittobecomealeadingindustrialpower.ManybelievethatthisgrowthhascomeattheexpenseoftheAmericaneconomy.Buthowtrueisthis?

AsJapanbuiltupitscomparativeadvantageinautoassembly,theUnitedStateswasfreeduptospecializeinothermarketswhereitcouldbuiltupitsowncomparativeadvantage.Thesemarketsincludedfinance,hightechnologyandthemanufactureofautoparts.Eachofthesemarketsarefundamentaltothedeliveryofgoodsandservicesincludingtheproductionofautomobiles.Byspecializingintheareasoftheircomparativeadvantage,AmericaandJapanareabletocomplementeachother’sproduction.

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Byworkingtogetherintrade,eachsidecanguaranteethatthefinalproductissoldatthebestpricefortheconsumersofbothcountries.ThisallowsforagreaternumberofpurchasersforboththeJapaneseandAmericanfirms.Further,themoreofthesegoodsthataresold,thestrongertheeconomywillbeineachofthepartnernations.

Suchinterdependentrelationshipsarebecomingmoreandmorecommonastheglobalmarketplaceexpands.Thisexpansionoftradeguaranteesbettereconomiesandabrighterfutureforallnationsinvolved.

Principle#6MarketsareUsuallyaGoodWaytoOrganizeEconomicActivity

Inanyfreemarketeconomy,thepricesofgoodsandservicesaredeterminedbythelawsofsupplyanddemand.

Thepricesandquantitysoldofgoodsandservicesreachequilibriumbyrespondingtothebehaviorofbuyersandsellers.Theforcethatmovespriceandquantitytoequilibriumiscalled“TheInvisibleHand,〞aphrasecoinedbyAdamSmithinthe1700s.

Inamarketplacethatisheavilyregulatedbythegovernment,thisinvisiblehandcannolongerwork,becausepricesreflectpoliticalpolicyratherthantheconsumer’schoice.

Before1978,America’sairlineindustrywasaregulatedmarketplacewherepricesweredeterminedbythegovernment.Consumershadlittlechoiceintermsoffare,airline,orqualityofservice.

Afterfivedecadesofregulation,pricescouldnotadjustnaturallytofreemarketforces.Becausefaresweresetbyplanningcommittees,airlineshadnoincentivetocompeteforcustomersortorunefficiently.

AirlineshadbecomesoinefficientandpollutingthattheproblemcametotheattentionoftheU.S.Congress.

Congressreasonedthatbysettingmarketforceslooseintheairlineindustry,airlineswouldsooncompetewithoneanotherforpassengers.

In1978CongresspassedtheAirlineDeregulationActwiththesupportofPresidentCarter.Theyspeculatedthattheinvisiblehandofafreemarketwasstillagoodwaytoorganizetheeconomicactivity.

Byopeningmoreroutestocompetition,moresuppliersenteredthemarket.Theyhopedthatthiswouldleadtolowerairfares,betterefficiency,technologicaladvances,andgreaterchoicesfortravelers.

Intheyearsfollowingderegulation,theinvisiblehandofthemarketplacehasbenefitedallkindsoftravelers.

TakeAmy,forexample,whowantstoflyourtovisitherboyfriendfortheweekend.

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Inaregulatedmarket,shewouldhavethechoiceofoneortwocarriersandafarethatisfixedbythegovernment.Butinafreemarket,shecanchoosefromarangeoffaresandcompanies.Allthatisrequiredisacalltohertravelagent,whocancomparethepricesofallthemajorairlines.

Ifshecantravelwithoneairlineatanoff-peaktime,forexample,shecansavehundredsofdollarsoffthefullfareofanother.Aregulatedmarketplacewouldprobablynowallowthiskindofflexibility.

Deregulationhasforcedairlinestobecomeinnovativeincompetingwithoneanother.

Thisgraphdemonstratesthehubandspokesystemdevelopedbytheairlinesasaoutgrowthofderegulation.Assmallregionalairports,orspokes,feedintolargerhubsinamajorcity,passengersareroutedtotheirdestinationfromthehub.Largeairlinescancontroltheterminalsattheirhubairportsandchargeotherairlinestousethem.

UnitedAirlines,forinstance,oftenroutespassengertrafficthroughtheirChicagohub.Theythenservicesmallerairportswitheconomicalpropellerplanesandsavelargejetsforlongerroutesthathavemorepassengers.Forthisreason,Amymightmakeastopatalargeairportbeforecontinuingontoherdestination.

SouthwestAirlinesisagoodexampleofacompanythathasbenefitedbyderegulation.Itbeganasasmallcommuterairlinewhichservedmarketsignoredbylargercompanies.

Flyingshortandlow-maintenanceroutesenabledSouthwesttoquicklyestablishitselfasapriceleader.

Sinceshorterroutesrequirelessmaintenanceandsmallercrews,Southweststreamlinedoperations.Theyhavedevelopedpassengerroutingandbaggageloadingtechniquesthatallowthemtoturnaplanearoundinthirtyminutes.Theysavetimeandmoney,thekeystosurvivalintheairlinebusiness.

Thisefficiencytranslatesintosavingsonfuel,labor,insuranceandotherexpensesthatgetpassedontotheconsumer.

EfficiencyistheoutstandingadvantagethatSouthwestusesoveritscompetitors.Tofillanundersoldflight,Southwestcanaddpassengersforliterallythepriceofpeanuts.

OtherairlineshavetriedtomimicSouthwest’ssuccess.Astheyenterthemarkettheincreasedcompetitionkeepspricesincheck.Thispreventsanyoneairlinefrommonopolizingthemarket.

Someairlines,however,werenotabletosurviveafterderegulation.GiantsofthepastlikePanAmandEasternairlinesfoldedin1991becausetheywereunabletostreamlineoperationsandmatchthelowerfaresoftheircompetitors.Instead,expensestooktheretollaslaborunionsresistedwagecuts.

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Otherairlineswereforcedtomaketrade-offsintheirquestforefficiency.Compromisesinsafetyhavebeenuncoveredasairlinecutexpensestostaycompetitive.Orsomeairlineareforcedtoflyanagingfleetlongerinanefforttoavoidexpendituresandkeepairfaresdown.

Yetoverall,deregulationoftheairlineindustryhasbeenawindfalltotheconsumer.TheUSGeneralAccountingOfficereportsthatonaverage,airfaresaredownalmost10percentatsmall,medium,andlargeairportssincederegulation.

Theincreasednumberofflights,savingsintraveltime,andoverallefficiencyofthehub-and-spokesystemhassavedUSconsumers10.3billiondollarsayear.Deregulationhasalsospurredoveralladvancesinsafely.Theaccidentrateperonehundredthousanddepartureshasdropped90%.

Byremovingbarrierstofreecompetition,thegovernmenthasallowedtheairlineind