[BETA] Fortnightly

Economists often seem enamored of economic efficiency, honoring its merits while decrying the lost benefits of inefficient outcomes. But really ... what's the harm in a little inefficiency? Well, the harm may be more real than we recognize. Take, for example, the notably inefficient pricing structure for access to the local telephone network The price of basic local telephone service is kept artificially low, supported by a complex web of mandated subsidies, including: 1) revenues from artificially inflated long-distance prices, 2) allocations between classes of customers (e.g., from business to residential), and 3) geographic rate averaging (e.g., high-density urban areas to low-density rural). This pricing system arose before competition (em to accomplish the goal of ubiquitous, reasonably priced telephone service. However, universal telephone service can now be achieved without mandated indiscriminate subsidies.

The Access Charge Subsidy

Telecommunications pricing relies intentionally on extensive interservice support to maintain a local exchange network available universally at reasonable rates. But the effort is inefficient.

For example, the pricing system recovers a majority of costs not from users who seek access to the telephone network, but from interexchange carriers (IXCs). The IXCs pay access charges to local exchange telephone carriers (LECs) for the use of the local network; these costs then fall ultimately upon long-distance callers. However, the LEC incurs the same cost to provide customer access to the telephone network whether the customer places a thousand or zero calls. The resulting cross-subsidy was mandated in a near-monopoly environment to keep local rates as inexpensive as possible, thereby encouraging universal telephone service. In other words, consumers, regardless of need, pay artificially low local rates at the expense of, among other things, artificially high interstate toll rates.

Economic estimates indicate that the price of basic local service exerts little influence over the customer's decision to buy or retain the service (The price elasticity of demand for local service is extremely low). At the same time, however, the unit price of interstate long-distance greatly influences the demand. Consequently, the toll-to-local subsidy begets losses in efficiency in the billions of dollars1. Existing subsidies "also create a pattern of subsidization that does not consistently promote universal service or equitable pricing."2 The web of interservice subsidies was once sustainable. Today, however, to no one's surprise, the subsidy-laden margins in LEC prices for local access (together with advancements in technology and regulatory sanctions) have attracted significant competition, threatening the source of the universal service subsidy.

In the mid-1980s, to correct some of the inefficiency in customer-access pricing, the Federal Communications Commission (FCC) implemented and gradually increased the federal subscriber line charge (SLC), a flat-rate monthly federal charge collected from all end users. The SLC recovers a portion of the interstate nontraffic-sensitive costs of accessing the telephone network (i.e., cost of loop facilities from the LEC's wire center to the customer premises). Thus, the SLC shifts recovery for customer access from the IXCs to the end user. Phase-in of the federal SLC directly reduced LEC interstate access charges, specifically the carrier common-line charge.

At the time, concern developed that the SLC would cause residential