The Effects of Regulation on an Industry; S. Gifford

Economics is a discipline in its own right, but it has some larger meanings and implications. Its very nature demands a framework in which there are religious and ethi cal ingredients. Establish these necessary conditions-together with their legal and political corollaries -and within this framework the economic activities of men are self starting, self-operating, and self regulating. Given the proper frame work, the economy does not have to be made to work; it works by itself, and it pays rich dividends 'in the form of a free and pros perous commonwealth. , Shari Gifford The Effects of Regulation on an Industry WHAT A SITUATION! A person, who has decided to go into business for himself, discovers that he must first obtain a license from the govern ment. To get the license he must prove to the authorities that he is a citizen of moral character with fi nancial, technical and other qualifi cations. He must describe in detail all equipment, buildings, location and any other apparatus necessary Shari Gifford is a student of economics at the Uni versity of florida.

for operation. He must describe his proposed production techniques, in cluding times of operation. He must survey the community leaders to de termine the needs of the community and describe how he proposes to meet these needs. He must also show that he is financially capable of setting up and operating his busi ness for one year without any reve nue from the sale of his product. To facilitate the acquisition of the license he must hire a lawyer in 1979 THE EFFECTS OF REGULATION ON AN INDUSTRY 301 Washington, D.C., spend tens of thousands of dollars, and wait perhaps five years before the license is approved. He must also have a permit from the same regulatory agency to begin construction of his operating facilities and must apply for an .extension of the permi t if construction is delayed by causes beyond his control. Before beginning operation, he must have approval of his operating hours and the name of his company.

If he should die or become legally disabled, permission must be ob tained for transfer of control to a legally qualified successor. If he lives long enough to want to expand his business, he must obtain permis sion for that also. Every three years he must apply for renewal of his license to continue operating his business, at which time he must supply detailed exam ples of his previous production pro cess and proof that he has used a sufficient amount of a certain factor which the authorities consider bene·, ficial to society but which may actu·, ally be unproductive. At this time he may be denied permission to con·, tinue operation. Considering the difficulty of ob·· taining a license, the high costs in volved, and the eagerness with which licenses are sought, it seems safe to assume that the possible re turn on investment is high. This has been a brief and incom·· plete description of some of the regu lations of the radio broadcast indus try imposed by the Federal Com munications Commission. The FCC was brought into being by the need to allocate a scarce resource-the radio wave bands. The Radio Act of 1927 gave the Federal Radio Com mission (now the FCC) the power to license radio broadcast stations ac cording to guidelines, a few of which have been listed above.

The Rationale for Licensing Licensing was deemed necessary because of the limited number of frequencies and the impossibility for simultaneous broadcasts on the same frequency in the same area at the same time. But the limits to competition in the radio broadcast industry caused by the barriers to entry-namely, limited and costly licenses and the high costs of meet ing regulatory requirements-does a disservice to the listening audi ence by limiting their choices of broadcast entertainment and a dis service to advertisers by increasing the cost of advertising on the radio. A radio broadcaster produces one product, an audience to sell to ad vertisers. His inputs are land, labor and capital (buildings, equipment, license). The costs of these factors can run into millions of dollars a year. The production process is his programming, which is geared to attract the largest audience to sell to 302 THE FREEMAN May advertisers. Local advertising sales are a station's major source of reve nue. Radio stations direct their pro gramming toward a particular age or social group and advertisers choose the station from which to buy time according to the group of people they wish to reach. Small com munities often have only one station serving a particular group and so it may be considered the only supplier of that audience. This is in effect a monopoly, with other radio stations or newspapers as partial substi tutes.

The number of competing stations is limited by the relative unavaila bility and high costs (in money and time) of new licenses. The number of licenses available is restricted, of course, by the desire to avoid· inter ference by one station with another. But the number of licenses is also limited (by the FCC) according to the population of the community. Smaller communities are allocated fewer frequencies. Also, powerful distant stations are allowed a large range of reception which precludes the use of their frequencies in neighboring communities. The un availability of new licenses, of course, increases the value of exist ing licenses, which amounts to a windfall gain for the original licen see. Nevertheless, many licensed broadcasters consider most FCC regulations to be costly, wasteful, and inappropriate in relation to the freedom of other news and enter tainment media. Alternative Allocation Methods The allocation of frequencies to prevent interference is necessary.

However, the present method of al location is questionable because of the amount of government interven tion and regulation it entails. Al ternative methods come to mind that would require little if any de tailed government control. One method would be to allocate newly available frequencies to the highest bidders. This would tend to keep the cost of licenses high. But, at least, it would allocate the fre quencies to those who value them most. Another method could be the allocation of frequencies by draw, thereby awarding some licenses to people who could not afford to bid high enough. This, however, may result in a misallocation of resources as some frequencies would go to low-value users. A third method could be on a first come, first served basis with a ~~homestead" provision that would require the recipient of the license to commence broadcast ing within a specific period of time.

This last method would be similar to the present method if there were not also the elimination of the volumes of requirements and regulations that control the broadcasters now. Once a license has been given (sold, awarded or earned), the nor1979 THE EFFECTS OF REGULATION ON AN INDUSTRY 303 mal success motives, talents and abilities of the licensee should be all that is needed to determine whether the station operates successfully or joins the ranks of thousands of busi ness failures that occur every year in other industries. Success or fail ure would be determined by the abil ity of the station to attract an audi ence. Thus, the broadcaster would be guided by the market to offer what the public demands, not what the FCC mandates. The elimination of the FCC rules and regulations would decrease the operating costs of stations consider ably and also allow for more local stations. Their increasing competi tion for advertisers would lower costs of advertising. Local advertis ers, who supply most of a station's revenue, are interested in the local market; therefore, the restriction of stations to local broadcasting to pre vent interference in neighboring communities would not reduce their attractiveness to advertisers and would allow the existence of more frequencies in each community. The Hanford Henderson increased number of stations would increase the service to the public by providing a larger variety of enter tainment and news.

In short, the FCC controls in mi nute detail the ownership and oper ation of all radio broadcasting, os tensibly to achieve efficiency, equity, safety, and satisfaction of public needs. The primary results of these regulations are to protect the stations from competition and to limit the satisfaction of the radio audience. Just as the airline com panies, with the recent deregulation of the airline industry, experienced an increase in profits, so the broad cast industry would see an increase in the quantity of air time de manded and an increase in profits if the restrictions and costs of regula tion were eliminated. Just as more people are now enjoying what was once the luxury of flying, so more people would enjoy listening to their radios with an increase in amount and variety of broadcasting offered. i IDEAS ON UBERTY WE ask of the State and. Society only one thing-a fair field and no favors. This does not mean the raw anarchism of the tramp and hoodlum, for such anarchism would have no government whatever; but it does unequivocally mean a strict limiting of the functions of govern ment, a strict cutting out of all paternalistic activities, and the unfalter ing insistence that government shall really perform its basic and fundamental duty, the protection of the individual citizen from violence and interference.