Competition, cross-subsidies, and residential telephone access

by Leland Johnson

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The FCC has recently adopted a plan that will reduce the subsidies paid by users of interstate MTS and WATS to support residential access, forcing residential rates to rise. The purposes of this paper are (1) to show how access rates will likely be affected by competitive pressures, given the increased difficulty of maintaining cross-subsidies, (2) to address the conflict between the objective of economic efficiency on one hand and the goals of maintaining both universal service and distributional equity on the other, and (3) to assess alternative ways of handling these conflicts. The author concludes that, despite attempts by regulators and others to keep access rates low, rates may rise far above the levels triggered by the FCC's recent decision, in order to reflect more accurately marginal costs of access. This increase will contribute to economic efficiency, but at the expense of much agonizing by regulators, legislators, and others faced with competitive market forces over which they may have little control.

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