Should the U.S. Subsidize Rural Telephone Companies

The 1934 Communication Act states that regulation should make available, so far as possible, to all people of the United States, a rapid, efficient, nationwide and worldwide wire and radio communications with adequate facilities at reasonable charges [47 USC 214]. This so-called universal service mandate has led to the government policy of subsidizing rural telephone companies. Conventional wisdom holds that small rural telephone companies have considerably higher average costs than the industry as a whole. A major factor affecting the cost of providing telephone is the density of subscribers.' Other things being equal, the fixed costs (non-traffic-sensitive costs) are greater the lower the density of subscribers.2 Thus rural areas, where density is generally low, probably have higher fixed costs per subscriber than urban areas. However, other costs such as taxes and operating expenses may be lower in rural areas. In this study I attempt to compare and contrast the various cost and revenue segments of the diverse telephone industry to determine the actual cost of providing telephone service. This research provides insight into whether rural telephone companies are actually high-cost firms and whether a subsidy is justified

Business · Economics · Market economy · Subsidy · ICT Impact and Policies · Merger and Competition Analysis