Where's the value in broadband service subsidies?

6 March 2016 by Steve Blum

Network effects.

When you subscribe to broadband service, you enjoy its benefits. But your purchase also benefits everybody else on the Internet: the more connections a network has, the more useful – and more valuable – it can be. In an analysis of a ban on Internet access taxes, the non-partisan congressional research service (CRS) discussed the rationale for subsidising broadband access…

When an individual is making a decision about whether to purchase Internet access…they will consider only their personal benefits from accessing the Internet and may not consider the external benefits they will create by purchasing Internet access. This results in fewer individuals accessing the Internet than is socially optimal. Increasing the number of individuals on the Internet could improve economic efficiency, by bringing the number of people on the Internet closer to the socially optimal level.

But the personal benefit is sufficient incentive for most people to subscribe. If they can afford it. So, the argument goes, lowering the cost of broadband service for everyone doesn’t make economic sense…

The subsidy offered…helps low-income individuals afford Internet access, but it also provides a subsidy for upper- and middle-income individuals who would have likely purchased Internet access regardless of the subsidy. Offering a more targeted subsidy exclusively to lower-income individuals would help ensure they have access to the Internet, while avoiding the inefficiencies generated by subsidizing individuals who would have purchased Internet access regardless of the [subsidy].

The CRS white paper concerned taxes on Internet access (oddly, it reckoned the failure to tax it as a subsidy). It didn’t directly address low income broadband service subsidies – the lifeline program under consideration by the Federal Communications Commission, for example – or low cost packages attached as conditions for regulatory approvals, such as the California Public Utilities Commission’s blessing of Frontier’s purchase of Verizon wireline systems. But it offers a rational way of evaluating those programs: is the economic value of the direct “external benefits” to tax (or rate) payers equal to or greater than the cost they bear?