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Costs and Consequences of Costs and Consequences of Telecom and Broadband Telecom and Broadband
RegulationsRegulations
Jerry ElligJerry Ellig
Senior Research FellowSenior Research Fellow
$105 billion annually at stake for consumers$105 billion annually at stake for consumers
Unbundled network elements
Local number portability
Enhanced 911
Satellite regulation
Resale of incumbent’s local service
Number pooling and CALEA
Long-distance access charges
Broadband regulatory uncertainty
Universal service
Spectrum management
Cost to consumers of these regulations…
How much?How much?
$11.1 billionUnbundled network elements
$1.7 billionLocal number portability
$1.2 billionEnhanced 911
UnknownSatellite regulation
$21 millionResale of incumbent’s local service
$800 millionNumber pooling and CALEA
$3.6 billionLong-distance access charges
$4.5 billionBroadband regulatory uncertainty
$4.4 billionUniversal service
$77 billionSpectrum management
Regulatory costs dwarf FCC Regulatory costs dwarf FCC spendingspending
FCC outlays 2004: $361 millionFCC outlays 2004: $361 million
FCC 2004 net cost of 3 regulation-FCC 2004 net cost of 3 regulation-related strategic goals: $1.2 billionrelated strategic goals: $1.2 billion
Excess burden of taxation: $144-480 Excess burden of taxation: $144-480 millionmillion
Potential effects of economic regulationPotential effects of economic regulation
Force monopoly to charge “competitive” priceForce monopoly to charge “competitive” price Transition from monopoly to competitionTransition from monopoly to competition Price below competitive levelPrice below competitive level Create market power/raise priceCreate market power/raise price Inflate costsInflate costs Reduce or redirect innovationReduce or redirect innovation Encourage expenditures to capture wealth Encourage expenditures to capture wealth
transferstransfers
What are costs of regulation?What are costs of regulation?
Wealth transfersWealth transfers+ Forgone consumer surplus+ Forgone consumer surplus== Total cost to consumersTotal cost to consumers
Forgone consumer surplusForgone consumer surplus++ Forgone producer surplusForgone producer surplus== Value of forgone output (“excess burden”)Value of forgone output (“excess burden”)
Wealth transfer + excess burden is widest Wealth transfer + excess burden is widest measuremeasure
How do the costs compare?How do the costs compare?
$120 billionTotal cost to society(Assumes wealth transfer is wasted)
$41 billion“Excess burden” (Forgone consumer + producer surplus)
$105 billionTotal cost to consumers(Assumes wealth transfer is wasted or goes to firms)
$25 billionForgone consumer surplus
$75 billionWealth transferred
Four kinds of regulationsFour kinds of regulations
Entry barriersEntry barriers
Taxes and subsidiesTaxes and subsidies
Network sharingNetwork sharing
Mandated services or functionsMandated services or functions
Entry barriersEntry barriers
SpectrumSpectrum
SatelliteSatellite
Taxes and subsidiesTaxes and subsidies
Long-distance access chargesLong-distance access charges
Other intercarrier compensationOther intercarrier compensation
Rural subsidiesRural subsidies
Low-income subsidiesLow-income subsidies
Schools/libraries programSchools/libraries program
Network sharingNetwork sharing
Unbundled network elementsUnbundled network elements
ResaleResale
DSL network sharing rulesDSL network sharing rules
Cable modem open accessCable modem open access
Mandated services/functionsMandated services/functions
911/Enhanced 911911/Enhanced 911
CALEACALEA
Local number portabilityLocal number portability
Number poolingNumber pooling
Compare costs with outcomesCompare costs with outcomes
Benefit: An increase in economic efficiency Benefit: An increase in economic efficiency (reduction in deadweight loss)(reduction in deadweight loss)
Outcome: A result policymakers and/or the Outcome: A result policymakers and/or the public seeks to achievepublic seeks to achieve
Excess burden %sExcess burden %s
61%Unbundled network elements
62%Local number portability
60%Enhanced 911
N.A.Satellite regulation
67%Resale of incumbent’s local service
62%Number pooling and CALEA
44%Long-distance access charges
N.A.Broadband regulatory uncertainty
43-62%Universal service
56%Spectrum management
Max 40%General federal taxation
Spectrum allocationSpectrum allocation
FCC allocation not necessary to prevent interference
Prevent signal interference
Tends to reduce consumer welfare
Consumer welfare
Implies no particular outcome
“Public interest”
Outcome AchievedIntended Outcome
Broadband unbundlingBroadband unbundling
UnknownReduce price
Appears to discourage investment
Encourage deployment
Outcome AchievedIntended Outcome
Universal ServiceUniversal Service
UnknownImproved educational outcomes
UnknownRedistribution to rural consumers
$5155-20,000 per added subscription
Increase rural subscription
Lifeline: $99/household
Linkup: $18/household
Redistribution to poor
$1581-2200 per added subscription
Increase low-income subscription
Outcome AchievedIntended Outcome
Long-distance access chargesLong-distance access charges
$24 average per low-income household
Redistribution to poor
Negligible or negativeIncreased low-income subscription
Negligible or negativeIncreased local subscription
Outcome AchievedIntended Outcome
Unbundled network elementsUnbundled network elements
Unlikely when reselling incumbent’s services
Innovative new services
Each $ gain costs $26Increased economic welfare
Substituted for facilities-based competition
Increased competition
$9.7 billion transferred,
but inefficiently
Lower prices
Outcome AchievedIntended Outcome
Local number portabilityLocal number portability
UnknownIncreased competition/
consumer welfare
Outcome AchievedIntended Outcome
Enhanced 911Enhanced 911
$1000 cost savings per cardiac patient
Reduced health/safety costs
Big reductions in cardiac mortality
Improved health/safety
Outcome AchievedIntended Outcome
Misc. wireless mandatesMisc. wireless mandates
UnknownCALEA – improved law enforcement/national security
UnknownNumber pooling – improved utilization of numbers
Outcome AchievedIntended Outcome
Resale of incumbent’s local serviceResale of incumbent’s local service
Unlikely when reselling incumbent’s services
Innovative new services
Has not been attractive entry strategy
Increased competition/ consumer welfare
Outcome AchievedIntended Outcome
Satellite regulationSatellite regulation
Neither costs nor outcomes for consumers Neither costs nor outcomes for consumers are well known.are well known.
Key questions to askKey questions to ask
Where has policy created barriers to Where has policy created barriers to competition?competition?
Is use of “taxed” services very responsive Is use of “taxed” services very responsive to price changes?to price changes?
What outcomes do we seek to achieve?What outcomes do we seek to achieve? How will we measure those outcomes?How will we measure those outcomes? What evidence shows whether changes What evidence shows whether changes
in outcomes were caused by policies?in outcomes were caused by policies?