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CAF Should Incorporate Cost-Effectiveness in Subsidy Distribution

CAF Should Incorporate Cost-Effectiveness in Subsidy Distribution

Wallsten Proposes Connect America Fund Should Abandon USF Cost-Based Approach

Contact: Amy Smorodin
(202) 828-4405

September 30, 2011 – The proposed Connect America Fund intended to provide broadband to high-cost areas should abandon a cost-based approach in favor of a value-based approach in which subsidies depend on whether the incremental benefits are worth the cost, argues Scott Wallsten in “How to Create a More Efficient CAF by Incorporating Demand and Cost-Effectiveness Analysis,” released today by the Technology Policy Institute. A cost-effectiveness analysis focused on willingness to pay and incremental effects can ensure the CAF is more efficient than the current universal service high-cost fund.

In the paper, Wallsten, TPI Senior Fellow and Vice President for Research, identifies two flaws in the current high-cost fund. Specifically, it does not incorporate how much consumers value the services being subsidized, and does not measure the incremental, rather than average, effects of the program. CAF can overcome both problems and operate far more efficiently than the existing high-cost program ever could.

To avoid replicating these flaws in the Connect America Fund, “decisions about where to provide subsidies should take into account how much consumers value the improvement in service the subsidy would bring beyond what is currently available.” This would require regular studies on what consumers are willing to pay for different levels of broadband service. “This information would be used to help determine what types of service should be subsidized in unserved areas, which areas to fund, and the maximum amount that should be spent on subsidies,” Wallsten explains.

Wallsten concludes that the approach outlined above, “will help achieve universal service objectives in a way that provides real benefits to citizens, does not enrich particular firms, and limits total spending.”

How to Create a More Efficient CAF by Incorporating Demand and Cost-Effectiveness Analysis” is available on the TPI website.

The Technology Policy Institute

The Technology Policy Institute is a non-profit research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org/.

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