Ellig Costs And Consequences Of Telecom Regulation Feb 2005


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Ellig Costs And Consequences Of Telecom Regulation Feb 2005

  1. 1. Costs and Consequences of Telecom and Broadband Regulations Jerry Ellig Senior Research Fellow
  2. 2. $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…
  3. 3. How much? $11.1 billion Unbundled network elements $1.7 billion Local number portability $1.2 billion Enhanced 911 Unknown Satellite regulation $21 million Resale of incumbent’s local service $800 million Number pooling and CALEA $3.6 billion Long-distance access charges $4.5 billion Broadband regulatory uncertainty $4.4 billion Universal service $77 billion Spectrum management
  4. 4. Regulatory costs dwarf FCC spending <ul><li>FCC outlays 2004: $361 million </li></ul><ul><li>FCC 2004 net cost of 3 regulation-related strategic goals: $1.2 billion </li></ul><ul><li>Excess burden of taxation: $144-480 million </li></ul>
  5. 5. Potential effects of economic regulation <ul><li>Force monopoly to charge “competitive” price </li></ul><ul><li>Transition from monopoly to competition </li></ul><ul><li>Price below competitive level </li></ul><ul><li>Create market power/raise price </li></ul><ul><li>Inflate costs </li></ul><ul><li>Reduce or redirect innovation </li></ul><ul><li>Encourage expenditures to capture wealth transfers </li></ul>
  6. 6. What are costs of regulation? <ul><li>Wealth transfers </li></ul><ul><li>+ Forgone consumer surplus </li></ul><ul><li>= Total cost to consumers </li></ul><ul><li>Forgone consumer surplus </li></ul><ul><li>+ Forgone producer surplus </li></ul><ul><li>= Value of forgone output (“excess burden”) </li></ul><ul><li>Wealth transfer + excess burden is widest measure </li></ul>
  7. 7. How do the costs compare? $120 billion Total cost to society (Assumes wealth transfer is wasted) $41 billion “ Excess burden” (Forgone consumer + producer surplus) $105 billion Total cost to consumers (Assumes wealth transfer is wasted or goes to firms) $25 billion Forgone consumer surplus $75 billion Wealth transferred
  8. 8. Four kinds of regulations <ul><li>Entry barriers </li></ul><ul><li>Taxes and subsidies </li></ul><ul><li>Network sharing </li></ul><ul><li>Mandated services or functions </li></ul>
  9. 9. Entry barriers <ul><li>Spectrum </li></ul><ul><li>Satellite </li></ul>
  10. 10. Taxes and subsidies <ul><li>Long-distance access charges </li></ul><ul><li>Other intercarrier compensation </li></ul><ul><li>Rural subsidies </li></ul><ul><li>Low-income subsidies </li></ul><ul><li>Schools/libraries program </li></ul>
  11. 11. Network sharing <ul><li>Unbundled network elements </li></ul><ul><li>Resale </li></ul><ul><li>DSL network sharing rules </li></ul><ul><li>Cable modem open access </li></ul>
  12. 12. Mandated services/functions <ul><li>911/Enhanced 911 </li></ul><ul><li>CALEA </li></ul><ul><li>Local number portability </li></ul><ul><li>Number pooling </li></ul>
  13. 13. Compare costs with outcomes <ul><li>Benefit: An increase in economic efficiency (reduction in deadweight loss) </li></ul><ul><li>Outcome: A result policymakers and/or the public seeks to achieve </li></ul>
  14. 14. Excess 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
  15. 15. Spectrum 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 Achieved Intended Outcome
  16. 16. Broadband unbundling Unknown Reduce price Appears to discourage investment Encourage deployment Outcome Achieved Intended Outcome
  17. 17. Universal Service Unknown Improved educational outcomes Unknown Redistribution 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 Achieved Intended Outcome
  18. 18. Long-distance access charges $24 average per low-income household Redistribution to poor Negligible or negative Increased low-income subscription Negligible or negative Increased local subscription Outcome Achieved Intended Outcome
  19. 19. Unbundled network elements Unlikely when reselling incumbent’s services Innovative new services Each $ gain costs $26 Increased economic welfare Substituted for facilities-based competition Increased competition $9.7 billion transferred, but inefficiently Lower prices Outcome Achieved Intended Outcome
  20. 20. Local number portability Unknown Increased competition/ consumer welfare Outcome Achieved Intended Outcome
  21. 21. Enhanced 911 $1000 cost savings per cardiac patient Reduced health/safety costs Big reductions in cardiac mortality Improved health/safety Outcome Achieved Intended Outcome
  22. 22. Misc. wireless mandates Unknown CALEA – improved law enforcement/national security Unknown Number pooling – improved utilization of numbers Outcome Achieved Intended Outcome
  23. 23. Resale 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 Achieved Intended Outcome
  24. 24. Satellite regulation <ul><li>Neither costs nor outcomes for consumers are well known. </li></ul>
  25. 25. Key questions to ask <ul><li>Where has policy created barriers to competition? </li></ul><ul><li>Is use of “taxed” services very responsive to price changes? </li></ul><ul><li>What outcomes do we seek to achieve? </li></ul><ul><li>How will we measure those outcomes? </li></ul><ul><li>What evidence shows whether changes in outcomes were caused by policies? </li></ul>