Free markets and rural universal service

Federal Communications Commission (FCC) Commissioner Ajit Pai raised an important issue when he decried the incomprehensible state of our rural universal service funding in a speech and op-ed article in Nebraska. However, despite claiming that “The Internet is the greatest free-market innovation in history” — although its free-market roots are debatable, as well as whether it is the “greatest” given innovations like electricity, commercial farming and advanced medicines — Pai eschews free-market principles in his proposal to modernize the rural universal service subsidy program to promote broadband Internet access.

{mosads}Instead, he follows the chairman and decades of commissioners before him by going along with the tried, true and massive subsidy programs that have no known effect on subscription rates. This anachronistic and out-of-date tax and subsidy scheme is merely an inefficient transfer of billions of dollars from urban areas to rural areas and, given the nature of how funds are raised, also a transfer from the poor to the wealthy.

The justification for the universal service program is the legitimate concern that the market on its own will leave some poor and rural citizens without access to critical telecommunications services and, therefore, unable to participate fully in society or be safe. But even if the free market can’t meet our societal goals of connecting everyone, universal service programs can still harness market mechanisms in a targeted way that achieves their stated goals instead of enriching incumbent rural telephone companies.

In a “free-market” system, consumers signal their willingness to pay for a good or service and providers compete to fill that demand. Reaping the benefits of a market system — even when consumers are not willing or able to pay for the service on their own — means abolishing the rural high-cost system and giving support directly to low-income rural households. With this support, low-income rural households could express demand for broadband and attract competitive providers alongside the demand expressed by high-income rural households. Support for low-income households in high-cost areas could be scaled to reflect to some degree the cost of serving those areas and to provide incentives for providers to compete to reduce the subsidy. With a pro-competitive consumer-based subsidy, many providers — wired and wireless — could compete with the incumbent rural telephone carriers to provide broadband service in rural areas.

We realize that flash-cutting the current system to zero could cause disruptions to rural carriers. However, it is possible to put in place a mechanism that allows time for a transition by decreasing the current rural universal service fund while increasing direct support to low-income rural residents over a fixed number of years.

Allowing competing providers to access currently protected markets would lead to innovation and additional build-out of wired and wireless coverage for rural areas. Not only would rural consumers benefit, but the reduction in subsidy — from no longer subsidizing wealthy rural residents — would benefit urban customers by reducing their bills by billions of dollars. Such price reductions would also increase urban subscriptions, especially by price-sensitive low-income urban households.

Pai’s proposal (and the original modification of the rural subsidy system put forth by the chairman) would simply ensure that ineffective subsidies continue to flow uninterrupted to politically powerful rural telephone companies.

Like Commissioner Pai, we, too, believe that markets have yielded unprecedented innovation. We hope he’ll realize that his love of markets should extend to universal service and also convince his fellow commissioners to take an economically rational and socially responsible approach to broadband subsidies.

Rosston is deputy director and senior fellow at the Stanford Institute for Economic Policy Research and director of the public policy program at Stanford University. Wallsten is vice president for research and senior fellow at the Technology Policy Institute.