1. www.Mercatus.org The Economic Costs of Spectrum Misallocation: Evidence from the United States Jerry Ellig Senior Research Fellow

2. www.Mercatus.org $105 billion annual consumer cost Spectrum management $77 billion+ Unbundled network elements $11.1 billion Universal service $4.4 billion Broadband regulatory uncertainty $4.5 billion Long-distance access charges $3.6 billion Local number portability $1.7 billion Enhanced 911 $1.2 billion Number pooling and CALEA $800 million Resale of incumbent’s local service $21 million Satellite regulation Unknown

3. www.Mercatus.org Current spectrum management FCC licenses devices that use spectrumFCC licenses devices that use spectrum Rulemaking allocates amount of spectrum for various usesRulemaking allocates amount of spectrum for various uses Licenses auctioned to private sectorLicenses auctioned to private sector FCC approval required for license transfersFCC approval required for license transfers

4. www.Mercatus.org Sources of regulatory costs Below-competitive pricesBelow-competitive prices Market powerMarket power Inflated costsInflated costs Stifled innovation and entrepreneurshipStifled innovation and entrepreneurship Rent-seekingRent-seeking

5. www.Mercatus.org Classification of regulatory costs Wealth transfers + Forgone consumer surplus =Total cost to consumers Forgone consumer surplus +Forgone producer surplus =Value of forgone output (excess burden) Wealth transfer + excess burden is widest measure

6. www.Mercatus.org How do the costs compare? Wealth transferred $75 billion Forgone consumer surplus $25 billion Total cost to consumers (Assumes wealth transfer is wasted or goes to firms) $105 billion “Excess burden” $41 billion Total cost to society (If wealth transfer is wasted) $120 billion

7. www.Mercatus.org Costs dwarf regulatory spending  FCC outlays 2004: $361 million  FCC 2004 net cost of 3 regulation- related strategic goals: $1.2 billion  “Excess burden” of taxation: additional $144-480 million

8. www.Mercatus.org Spectrum is a big portion of regulatory costs  72% of total wealth transfer  92% of total forgone consumer surplus  74% of total cost to consumers  73% of total excess burden  70% of wealth transfer plus excess burden  20% of all regulatory costs if spectrum costs are only 1/10 of Hazlett et. al.’s estimate

9. www.Mercatus.org Costs may be understated  Hazlett et. al. consider effects only of an additional 200 MhZ for wireless  Other services (e.g. broadband) have high demand elasticities  Economists systematically underestimate benefits of economic deregulation ex ante.

10. www.Mercatus.org For more information… Jerry Ellig, “Costs and Consequences of Federal Telecommunications and Broadband Regulations,” available at http://www.mercatus.org/regulatorystudies/ article.php/1074.html