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Democracy & Technology Blog Universal Service suffers same defect as health care system

Professor Vernon L. Smith provides a helpful analytical tool which explains why the cost of health care has doubled in the past decade and generally outpaces inflation and also demonstrates why Universal Service is inherently flawed and ultimately unsustainable (see “Trust the Customer!” in the Wall Street Journal).

A is the customer, B is the service provider. B informs A what A should buy from B, and a third entity, C, pays for it from a common pool of funds. Stated this way, the problem has no known economic solution because there is no equilibrium. There is no automatic balance between willingness to pay by the consumer and willingness to accept by the producer that constrains and limits the choices of each.”

Universal Service is exactly like health care and the other examples cited by Professor Smith. The telephone company tells the customer what they can buy and the FCC pays for it.
Naturally, according to Professor Smith, “if third-party deep pockets pay whatever is the price B charges A this year, the effect is to reinforce the incentive to raise the price next year.”
Fixing Universal Service will be a complicated task. For starters, audit recipients. Rigorous audits have not been part of the landscape for years.
Some suggest calculating the subsidy according to a forward-looking cost model instead of actual costs. This would reduce the subsidy, but these models rely on subjective inputs and would inevitably degenerate into a political football. Another idea is a reverse auction, where service providers compete for a government contract to serve a particular location. This puts bureaucrats rather than consumers in the driver’s seat.
Senator McCain proposed a voucher plan in 1995, which would enable the customer to choose their service provider. A voucher system would solve the problem of whether to subsidize the wireline or the wireless provider. Currently, both receive the same subsidy and this is the biggest reason why the High Cost Fund has doubled in the last few years. Some say the government should only subsidize one provider, but that means picking winners and losers. A voucher plan which would force the service providers to fight for each customer. One way they could compete is by offering lower out-of-pocket prices, and this could be used as a yardstick against which the size of the subsidies could be measured.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.