Policy Documents

Inclusion, Not Infrastructure: Rethinking Universal-Service Policy in a Broadband Era

September 1, 2009

Government subsidies represent capital purposefully redirected into unprofitable enterprises. The rationale for a subsidy comes when the government decides that a necessary product or service cannot be delivered by free-market mechanisms. It is an intentional diversion of capital to fill a gap between what a service costs to provide and what an average citizen can afford to pay.

In doing so, the government takes, either in the form of a tax or a loan at below-market interest rates, available capital away from investments that, in a totally free market, would yield more-productive return in the long term. That’s the societal trade-off. The loss in productivity and profitability is offset by what is perceived as a larger good: the faster expansion of a product or service deemed essential to the entire population.

Traditionally in the United States, federal and state governments have been selective about what they choose to subsidize. Roads, electricity, water and narrowband telephone service, because they are infrastructure-intensive and have been deemed essential for modern quality of life, have been subsidized as a matter of course, particularly in rural areas, where the cost per household can indeed be prohibitively high.

At the same time, the government chooses not to fund many other things that may be considered desirable but not essential. For example, while rural electricity networks are subsidized, the manufacturing of air conditioners, heaters, televisions and major household appliances is not.

Furthermore, although roads, electricity, water and telephone require expansive networks and expensive infrastructure, the scale of a project does not by itself make a case for government assistance. Modern freight-rail networks are essential to the timely movement of goods around the country, yet they are vibrantly competitive and function without government assistance.