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 st atus 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 wi th commitment in fact allows a monopoly to deter deregulation. The possibil ity of reregulation does not reverse our results; the per period welfare ga in from reform remains undiminished.