A number of regulated industries, particularly in transportation and communications, have recently undertaken the transition from a regime of rigid price and entry controls to that of a more competitive market structure. While the different industries have experienced somewhat different fates, the responses to this transition do have certain common underlying characteristics. To start, demands for some form of temporary or continuing regulation during the transition to deregulation can be explained almost entirely as a response to the strength of the entry threat relative to the magnitude of sunk costs incurred by the affected parties in the previous regulatory regime. Where the obstacles to entry are low, the incumbent firms and labor ordinarily seek during the transition to permit them to recover some or all of their sunk costs. When the obstacles to entry are high, customers are likely to make similar demands for protective conditions designed to do the same, particularly when the customers' own sunk costs severely restrict their competitive options after deregulation. Pleas for protective conditions during the transition are widely regarded as introducing market imperfections that should be resisted in the name of regulatory reform. This view, however, naively equates the market results during the transition (when choices are constrained by the presence of sunk costs) to the results that would prevail in a long-run equilibrium where deregulated prices and quantities are established in the absence of most (or any) sunk costs. The regulatory problem during the transition is to define a set of residual (hopefully self-terminating) economic constraints that will satisfy the equity and other considerations created by the shortto medium-term continuation of some sunk costs without creating insurmountable obstacles to approaching an efficient competitive outcome in the long run. Any transition mechanism must thus come to grips with the essence of the transition problem from a political as well as an economic perspective: who is to bear the consequences of the overhang of sunk costs. Note that we are not making a generalized plea for the compensation of losers from deregulation, especially for windfall gains conferred by the regulatory process itself (see Kenneth Gordon, 1981). Rather, the transition problem is defined here to be a limited period in which participants in the regulatory game are permitted to amortize financial commitments made under the prior set of rules while other participants are constrained in their ability to exploit the presence of those sunk costs during the transition. Misunderstanding or failing to recognize this transition problem can pose substantial dangers: specifically, premature application of economic concepts that, while arguably valid in some future regime in which all sunk costs are amortized, decidedly do not account for the effect of these sunk costs on the marketplace in the short run. Misunderstandings of the transition problem may also encourage false conclusions about the eventual results of deregulation, that is, the long-run competitive equilibrium and industry structure that will emerge. As a consequence, policy recommendations designed to address the problems of the transition may tDiscussants: Robert Willig, Princeton University; Thomas Moore, Hoover Institution.

Perhaps the most striking feature of the New England economy is that it is different-not only from the rest of the nation, but from the rest of the northeastern United States as well. New England's main departure from the national norm is, of course, relatively slow growth; it is conventional to describe New England as -economically, industrially, and maybe even demographically. This maturity manifests itself in many ways. While aggregate personal income in the United States expanded at an average annual rate of 4. 1 percent between 1960 and 1975, New England expanded at a rate of 3.6 percent per annum. Further, total manufacturing employment in Massachusetts and Rhode Island is only slightly higher today than in 1914. In the recent recovery from recession, New England lagged well behind the rest of the United States in expansion of total employment but nevertheless recorded some of the sharpest declines in unemployment rates so that New England unemployment is now near the national average even though it was much higher at the depth of the 1975 recession. The secret, of course, to New England's relatively rapid unemployment decline is slow workforce growth, as expected in a mature economy. New England's differences from the rest of the Northeast are perhaps less obvious and certainly less well known. It is fashionable today to speak in very broad terms of vs. sunbelt and to suggest that public policy should modulate differences in growth among the different sections of the country. The reality, though, is that aggregate figures for large regions of the country hide a good deal of internal diversity. Thus, New England not only seems to be doing better than conventional frostbelt wisdom would suggest, but its immediate prospects also appear more favorable than those of the mid-Atlantic states and probably much of the Midwest as well (see Benjamin Stevens and Glinnis Trainer). Even in the recent past, as between 1960 and 1976, when New England's aggregate personal income was growing 3.6 percent per year, the states of New York, New Jersey, Pennsylvania, Maryland, and Delaware had a combined average annual compound growth rate of only 3.3 percent. Similarly, a shift-share analysis has indicated that the entire Northeast (by virtue of a favorable industry mix) should have been in a position to gain in share of U.S. jobs throughout the 1960's. The New England states (except for extreme northern Maine) have indeed done as expected. Large areas of the remaining Northeast, however, have experienced significant competitive shifts or losses (see Richard Olsen). To a considerable extent, in fact, any New England success in recent years may have been at the expense of its immediate neighbors. New England production costs perhaps have not been as low as in much of the Southeast in recent years, but they apparently have been competitive with the Middle Atlantic, and especially New York City. In fact, total manufacturing costs in several industries (for example, ordnance, primary metals, fabricated metals, nonelectrical machinery, transportation equipment, paper and printing) have been lower recently in Massachusetts (probably the highest cost New England Harvard University. The Economic Development Administration of the U.S. Department of Commerce and the 1907 Foundation provided financial support for this research.