Ellig Spectrum Misallocation Francisco Marroquin Conference June 2005

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Ellig Spectrum Misallocation Francisco Marroquin Conference June 2005

  1. 1. The Economic Costs of Spectrum Misallocation: Evidence from the United States <ul><li>Jerry Ellig </li></ul><ul><li>Senior Research Fellow </li></ul>
  2. 2. $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 $105 billion annual consumer cost
  3. 3. Current spectrum management <ul><li>FCC licenses devices that use spectrum </li></ul><ul><li>Rulemaking allocates amount of spectrum for various uses </li></ul><ul><li>Licenses auctioned to private sector </li></ul><ul><li>FCC approval required for license transfers </li></ul>
  4. 4. Sources of regulatory costs <ul><li>Below-competitive prices </li></ul><ul><li>Market power </li></ul><ul><li>Inflated costs </li></ul><ul><li>Stifled innovation and entrepreneurship </li></ul><ul><li>Rent-seeking </li></ul>
  5. 5. Classification of regulatory costs <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>
  6. 6. How do the costs compare? $120 billion Total cost to society (If wealth transfer is wasted) $41 billion “ Excess burden” $105 billion Total cost to consumers (Assumes wealth transfer is wasted or goes to firms) $25 billion Forgone consumer surplus $75 billion Wealth transferred
  7. 7. Costs dwarf regulatory 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: additional $144-480 million </li></ul>
  8. 8. Spectrum is a big portion of regulatory costs <ul><li>72% of total wealth transfer </li></ul><ul><li>92% of total forgone consumer surplus </li></ul><ul><li>74% of total cost to consumers </li></ul><ul><li>73% of total excess burden </li></ul><ul><li>70% of wealth transfer plus excess burden </li></ul><ul><li>20% of all regulatory costs if spectrum costs are only 1/10 of Hazlett et. al.’s estimate </li></ul>
  9. 9. Costs may be overstated <ul><li>Hazlett et. al. consider effects only of an additional 200 MhZ for wireless </li></ul><ul><li>Other services (e.g. broadband) have high demand elasticities </li></ul><ul><li>Economists systematically underestimate benefits of economic deregulation ex ante. </li></ul>
  10. 10. For more information… <ul><li>Jerry Ellig, “Costs and Consequences of Federal Telecommunications and Broadband Regulations,” available at </li></ul><ul><li>http:// www.mercatus.org/regulatorystudies / </li></ul><ul><li>article.php/1074.html </li></ul>

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