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Do Lifeline Programs Promote Universal Telephone Service for the Pool?

Fortnightly Magazine - March 15 1997

rate for poor households. (See column titled Lifeline Households -Penetration in Table 2.) About 2.09 million households, or more than 94 percent of total Lifeline subscribers, form the redistribution group. (See column titled Lifeline Households-Redistribution in Table 2.) Lifeline subsidies are received by the redistribution group, but they do not increase the penetration rate for poor households. These households would be on the network regardless of whether they received Lifeline assistance or not.

The impact of Lifeline on the poor population can also be estimated for the individual states, although these estimates may lack precision (see Table 2). About 1 percent of the total number of households in Maine joined the telephone network as a result of Lifeline programs. Maine has the largest impact by far of any state on the poor household penetration rate for poor households (em an increase of 9.25 percent (em and might be viewed as one possible example where Lifeline programs have proven somewhat effective. However, more than 88 percent of the Lifeline subscribers in Maine would have chosen telephone service in the absence of Lifeline subsidies.

In California, about 0.6 percent of the households chose telephone service as a result of Lifeline. But these approximately 60,000 households represented less than 4 percent of the 1.6 million Lifeline subscribers in California. %n4%n Finally, Michigan had a relatively low estimated program elasticity where only an estimated 0.1 percent of the households were positively impacted by Lifeline. Here, more than 93 percent of the Lifeline subscriber households would have selected telephone service without Lifeline programs.

Some states have achieved a split between redistribution and penetration that is marginally better than the rest (e.g. Arkansas, Maryland, New Mexico, North Carolina, Texas and Virginia). However, of these states, only New Mexico and Virginia have improved poor penetration by more than 1 percent.

These results also bring up the "free-rider" problem. This issue concerns the "high-income" poor, who already receive telephone service and would subscribe in any event. Apparently, subscribers in this group enroll in Lifeline programs in much larger numbers than the "low-income" poor. This result is not unexpected since it is easier to recruit the high-income poor. California offers a gross example of this process. To be effective with the low-income poor, Lifeline programs would need an eligibility mechanism to target low-income poor households that would not otherwise subscribe. It is highly questionable whether such an effective and economically efficient mechanism currently exists.

The challenge in defining "universal service"

Leland Johnson %n5%n makes some key points in assessing Lifeline programs. Are the programs designed to promote universal service or simply to ease the financial hardship of paying telephone bills?

Promoting universal service focuses on keeping households on the telephone network and adding households to the network who do not have service. Easing the financial hardship of paying telephone bills simply redistributes income. It's a scheme made possible through telephone regulation. Effective promotion of universal service requires program characteristics different from a redistribution program. No program design will promote both objectives effectively.

The evidence from Johnson's study suggests that Lifeline programs