Advances in Regulatory Economics series
Edited by Michael A. Crew and Timothy J. J. Brennan
Chapter 13: On alternative USO financing mechanisms for the US postal market
The postal Universal Service Obligation (USO) in the United States has been funded by a statutory monopoly granted to the United States Postal Service (USPS) in certain markets. Under the volume growth that occurred until 2007, this financing mechanism garnered sufficient surplus from profitable areas to finance the loss-making activities required under the law. Monopoly protection insured that profitable activities remained available for such transfers by preventing cream skimming by entrants. With the advent of substantial intermodal competition in the United States, this mechanism is now failing. USPS has announced $16 billion in losses for fiscal year 2012. Putting aside controversial prefunding payments included in the figure, USPS still fails to finance its USO. Such financial shortfalls raise questions as to the viability of the traditional USO funding mechanism and whether an alternative funding mechanism could be more efficient. Alternative universal service mechanisms have been proposed in other countries and some countries have begun to establish compensation mechanisms in response. However, there has been little discussion of alternatives to the current postal USO financing mechanism in the US. This chapter introduces some potential alternatives for the United States, launching a preliminary investigation into a variety of regulatory designs based on compensation of the universal service provider (USP) by market participants, including parcel shippers who use its delivery services. As the chapter shows, differences in USO funding mechanisms will have an impact on market outcomes. The evolution of the US market makes this issue especially timely.
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