Local Telephone Pricing and Universal Telephone Service

by Rolla Edward Park, Bridger M. Mitchell

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This report describes an economic assessment of several different ways of trying to maintain universal telephone service in the face of increasing local telephone rates. The assessment is based on a simulation model that describes households and models the choice among optional tariffs. The simulation model is calibrated using recent empirical estimates of telephone demands and costs. The simulations compare various tariffs — including flat rates, mandatory measured rates, optional measured rates, and income-targeted lifeline rates — in terms of their effects on telephone penetration, economic welfare, and consumer surplus. At current price levels, neither optional measured rates nor lifeline rates have much effect on telephone penetration, even among low-income households. At a doubled price level that may prevail in the future, however, adding a measured rate option to flat rates increases penetration among low-income households by about 3 percent; adding lifeline service adds another 5 or 6 percent. At either present or future price levels, lifeline rates result in substantial consumer surplus transfers from higher- to lower-income households, although adding measured rate and lifeline options has little effect on aggregate economic welfare.

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