Enhancing Efficiency or Crying Over Spilled Milk: The Benefits of Reform.

We analyze the welfare gains from the reform of existing government-induced distortions. Our results provide support for policies aimed at eliminating monopoly and other types of economic distortion. Welfare gains over the status quo exist whenever deregulation occurs. The threat of deregulation can induce a monopoly or cartel to modify its behavior, so a reform policy can prove beneficial even if reform does not actually occur. Optimal policy with commitment in fact allows a monopoly to deter deregulation. The possibility of reregulation does not reverse our results; the per period welfare gain from reform remains undiminished. Copyright 2000 by Kluwer Academic Publishers