The Economics of Universal Service: An Analysis of Entry Subsidies for High Speed Broadband

Abstract

Universal service is a policy objective that all individuals or households have access to some service. Subsidy policies to accomplish universal service may arise when private provision is non-universal. In the context of rural high speed wired broadband subsidies, this paper examines novel household-level cable and satellite broadband subscription data from North Carolina to examine household adoption and substitution patterns across broadband types to evaluate how many currently unserved regions warrant an entry subsidy. This paper has three main findings: (i) fewer than 43% of households adopt high speed broadband in areas currently served by a single broadband provider, (ii) there exists evidence of a significant elasticity of substitution between high speed wired broadband and the lower speed options of satellite broadband and DSL, and (iii) a generous upper bound on the number of regions that warrant an entry subsidy is 64%. These results suggest a policy of universal high speed wired broadband service in North Carolina would be unlikely to achieve universal adoption, would connect many households already with internet access and who would not substitute, and in many regions would be prohibitively costly even assuming very generous estimates of the consumer surplus generated. From the perspective of social welfare, to justify connecting the 5% least dense areas of North Carolina would require each adopting household value high speed wired broadband access at more than $1519 per month.

Keywords: Universal service, entry subsidies, broadband, telecommunications

JEL Classification: L96, L97, L51, H71