Advances in Regulatory Economics series
Edited by Michael A. Crew, Paul R. Kleindofer and James I. Campbell Jr
Chapter 6: Funding Universal Service Obligations
* John C. Panzar† INTRODUCTION One of the many challenges facing policymakers is fostering competition in postal markets while, at the same time, preserving universal service. This is a diﬃcult undertaking, for to declare the need for a universal service policy is to admit that the unsubsidized competitive marketplace will fail to deliver a politically acceptable level of service at a politically acceptable price. However, competition and subsidization are like oil and water; they can be mixed only with great care. The purpose of this chapter is to explain the underlying logical exercise one must go through when attempting to measure the cost of fulﬁlling any speciﬁed universal service obligation (USO). My main point is that any USO costing exercise must begin with a careful speciﬁcation of an unsubsidized market scenario that would prevail in the absence of the USO. Many proposed measures of USO costs ignore this basic requirement. Or, more charitably, they implicitly assume an unsubsidized market scenario with only limited competition. Not surprisingly, the true cost of any speciﬁed USO is higher, the more competitive is the unsubsidized market scenario postulated.1 The remainder of the chapter is organized as follows: Section 2 presents the general principles for measuring USO costs relative to an unsubsidized market scenario. These include the need to take into account the incremental costs of subgroups of users as well as services, and the incumbent’s forgone revenues. Section 3 applies these principles to a stylized postal network under several market...
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