THE SIMPLE WELFARE ECONOMICS OF NETWORK EXTERNALITIES AND THE UNEASY CASE FOR SUBSCRIBERSHIP SUBSIDIES

The goal of universal service has dominated the telecommunications pol icy landscape for at least the past half century. This policy objectiv e has been promoted with cross subsidies from long-distance telecommun ications services to subscribers to local telecommunications service. The economic rationale for these cross subsidies is network externalit ies. In this paper, we show that: (1) the presence of network external ities, even if substantial in overall magnitude, does not generally ju stify a subscribership subsidy, even a well-designed one; and (2) the empirical realities of telecommunications markets make it unlikely tha t subscribership subsidies of any kind will increase social welfare.