Universal Service Contributions and Economic

Welfare

Jerry ElligSenior Research Fellow

jellig@gmu.edu

Effect of the Contribution Mechanism Universal Service contributions are similar to

a tax and can be analyzed as such

Explicit costs: Revenue raised

Hidden costs: Benefits society gives up when people change their behavior in response to the price change

Hidden cost of contribution mechanism

“Deadweight loss”:

Value of service that consumers forego, plus operating profits that producers forego, because increased price reduces use of the service

When is the hidden cost large? Additional costs of providing additional

service are low

Value of the additional service to consumers exceeds these costs

Consumer decisions are sensitive to price

Effect of a 1% price change

Wireline subscription 0.01-0.02%

Long-Distance minutes 0.7%

Wireless subscription 0.57%

Wireless minutes > 1.0%

Explicit + Hidden Costs

Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006).

U Service

Revenue

Hidden Cost

(DW loss)

Total

Cost

Long Distance

2002

$2.7 billion $1.16 billion $3.86 billion

Wireless

2004

$1.76 billion $978 million $2.7 billion

Hidden Cost as a % of Revenues Raised

Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006).

Long-Distance USF Contributions

43%

Wireless USF Contributions

56%

General Taxation 25-40%(OMB “rule of thumb” – 25%)

Costliest Federal Telecom Regulations

Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006).

Annual Hidden Cost

1. Spectrum Allocation $30 billion

2. USF Contributions $2.14 billion

3. L-D Access Charges $1.5 billion

4. Wireless E-911 $693 million

5. Wireless number

portability

$568 million

Effects of numbers-based contribution on size of hidden costs

Source of last figure: Jerry Ellig & James N. Taylor, “The Irony of Transparency: Unintended Consequences of Wireless Truth-in-Billing,” Loyola Consumer Law Review 19:1 (2006), pp. 43-69.

Wireline access: Hidden costs approximately unchanged

Long-distance: Hidden costs fall to approximately zero

Wireless: Hidden costs fall by $530 million annually

Caveats Around the Edges

Low-income demand for wireline access is 2-3 times more price sensitive than average household

Per number charge on additional “family plan” wireless lines would be a large % of the price

Per number charge on low-usage per-minute wireless plans would be a large % of the price

The Bottom Line

Numbers-based charge can reduce hidden costs by $1.7 billion (or more) annually.

Hidden cost falls by 80 percent, from $2.14 billion to $440 million.

For more information …Jerry Ellig, “Costs and Consequences of Federal Telecommunications

Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006), available at

http://www.mercatus.org/Publications/pubID.1229/pub_detail.asp

Jerry Ellig & James N. Taylor, “The Irony of Transparency: Unintended Consequences of Wireless Truth-in-Billing,” Loyola Consumer Law Review 19:1 (2006), available at

http://www.mercatus.org/Publications/pubID.2494/pub_detail.asp

Jerry Ellig & Alastair J. Walling, “Regulatory Status of VoIP in the Post-Brand X World,” Santa Clara Computer & High Technology Law Journal 23:1 (Nov. 2006), available at

http://www.mercatus.org/Publications/pubID.1430/pub_detail.asp