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The Economic Costs of Spectrum Misallocation:

Evidence from the United States

Jerry ElligJerry Ellig

Senior Research FellowSenior Research Fellow

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$105 billion annual consumer cost $105 billion annual consumer cost

Spectrum managementSpectrum management $77 billion+$77 billion+

Unbundled network elementsUnbundled network elements $11.1 billion$11.1 billion

Universal serviceUniversal service $4.4 billion$4.4 billion

Broadband regulatory uncertaintyBroadband regulatory uncertainty $4.5 billion$4.5 billion

Long-distance access chargesLong-distance access charges $3.6 billion$3.6 billion

Local number portabilityLocal number portability $1.7 billion$1.7 billion

Enhanced 911Enhanced 911 $1.2 billion$1.2 billion

Number pooling and CALEANumber pooling and CALEA $800 million$800 million

Resale of incumbent’s local serviceResale of incumbent’s local service $21 million$21 million

Satellite regulationSatellite regulation UnknownUnknown

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Current spectrum management

• FCC licenses devices that use spectrumFCC licenses devices that use spectrum

• Rulemaking allocates amount of spectrum Rulemaking allocates amount of spectrum for various usesfor various uses

• Licenses auctioned to private sectorLicenses auctioned to private sector

• FCC approval required for license FCC approval required for license transferstransfers

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Sources of regulatory costs

• Below-competitive pricesBelow-competitive prices

• Market powerMarket power

• Inflated costsInflated costs

• Stifled innovation and entrepreneurshipStifled innovation and entrepreneurship

• Rent-seekingRent-seeking

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Classification of regulatory costs

Wealth transfersWealth transfers+ Forgone consumer surplus+ Forgone consumer surplus== Total cost to consumersTotal cost to consumers

Forgone consumer surplusForgone consumer surplus++ Forgone producer surplusForgone producer surplus== Value of forgone output (excess burden)Value of forgone output (excess burden)

Wealth transfer + excess burden is widest Wealth transfer + excess burden is widest measuremeasure

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How do the costs compare?

Wealth transferredWealth transferred $75 billion$75 billion

Forgone consumer Forgone consumer surplus surplus

$25 billion$25 billion

Total cost to consumersTotal cost to consumers(Assumes wealth transfer is (Assumes wealth transfer is wasted or goes to firms)wasted or goes to firms)

$105 billion$105 billion

““Excess burden”Excess burden” $41 billion$41 billion

Total cost to societyTotal cost to society(If wealth transfer is wasted)(If wealth transfer is wasted)

$120 billion$120 billion

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Costs dwarf regulatory spending

FCC outlays 2004: $361 millionFCC outlays 2004: $361 million

FCC 2004 net cost of 3 regulation-FCC 2004 net cost of 3 regulation-related strategic goals: $1.2 billionrelated strategic goals: $1.2 billion

“ “Excess burden” of taxation: additional Excess burden” of taxation: additional $144-480 million$144-480 million

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Spectrum is a big portion of regulatory costs

72% of total wealth transfer72% of total wealth transfer 92% of total forgone consumer surplus92% of total forgone consumer surplus 74% of total cost to consumers74% of total cost to consumers 73% of total excess burden73% of total excess burden 70% of wealth transfer plus excess burden70% of wealth transfer plus excess burden

20% of all regulatory costs if spectrum costs 20% of all regulatory costs if spectrum costs are only 1/10 of Hazlett et. al.’s estimateare only 1/10 of Hazlett et. al.’s estimate

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Costs may be understated

Hazlett et. al. consider effects only of an Hazlett et. al. consider effects only of an additional 200 MhZ for wirelessadditional 200 MhZ for wireless

Other services (e.g. broadband) have Other services (e.g. broadband) have high demand elasticitieshigh demand elasticities

Economists systematically Economists systematically underestimate benefits of economic underestimate benefits of economic deregulation ex ante.deregulation ex ante.

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For more information…

Jerry Ellig, “Costs and Consequences of Jerry Ellig, “Costs and Consequences of Federal Telecommunications and Federal Telecommunications and Broadband Regulations,” available atBroadband Regulations,” available at

http://http://www.mercatus.org/regulatorystudieswww.mercatus.org/regulatorystudies//

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