We shouldn’t.
I came across this post by Stephanie Mehta on a blog associated with Fortune magazine about how copper may soon almost disappear from telecommunications infrastructure. From what I understand, the backbone of telecommunications uses fiber optics currently, with copper covering the “last mile” to the customer. But soon, fiber or other technologies may claim that last stretch as well. The post draws inspiration from Tom Evslin, a former VoIP entrepreneur.
What bugged me was the anxiety about whether rural residents will get left behind. Nothing wrong with that per se, but predictably Mehta and Evslin move on to support the use of taxpayer money to solve the problem, in particular a Vermont program that subsidizes rural infrastructure investment through government bonds.
Why on earth should taxpayers in the state of Vermont be subsidizing telephone and internet service for rural residents in the state? Certainly, there is no public goods problem — these goods are excludable. I don’t see any problems arising from information asymmetry or externalities, either, so I don’t think market failure is an issue. The market should be working efficiently, even if that means rural areas have few services. Conversely, subsidies probably create inefficiency.
All that is left is fairness. Is it fair that rural residents must go without some of the services that are available in more populated areas? In reply, I would rearrange the question: is it fair for those living in more populated areas to be forced to pay so that rural residents can have all the same amenities of urban/suburban life?
As in many discussions of fairness in public policy, an important question is whether the particular group/class of people are stuck in their circumstances or have a choice. In this case, it is pretty obvious that rural residents are not bound to the land — they could move to the city. Indeed, over the last few decades we have seen massive urbanization all across the developing world, demonstrating that even terribly poor people manage to physically move from the countryside into the city. So, fairness is not an issue. I can think of no reason to support a policy like Vermont’s.
Update 5/31: Tom Evslin pointed out that the Vermont program is not a good example of subsidization, namely because there is no direct subsidization going on. When I asked “Why on earth should taxpayers in the state of Vermont be subsidizing,” I mischaracterized the program. However, the use of state-backed bonds nevertheless is a form of indirect subsidization, redirecting scarce investment away from everything else toward rural telecom infrastructure.
Good Morning, Economics 
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May 26, 2007 at 12:09 pm
john
You should know that Vermont is a state pas comme les autres… Have you ever been there? It’s definitely a different kettle of fish. One town wants to secede.
http://en.wikipedia.org/wiki/Killington,_Vermont_secession_movement
anyway i’m sure it’s partly because vermont, population 600,000, is itself mostly rural. Largest town, Burlington, has a population of ~40,000.
Also possibly because everyone doesn’t think of everything purely from the enlightened standpoint of the present paradigms of academic Economics.
May 26, 2007 at 1:10 pm
cdfox
Nope, never been there.
Even without large cities, providing telecom services in small cities is still probably very different than in rural areas.
“Also possibly because everyone doesn’t think of everything purely from the enlightened standpoint of the present paradigms of academic Economics.”
I think you’re right, which is too bad since economics is a useful tool for evaluating public policy. Then again, I wouldn’t expect many people to go out and learn economics for that reason, since it would be a rather large inconvenience given how little impact the individual voter has on policy.
Regarding your skeptical tone, the position I am advocating is informed by but part of academic economics, as economics itself has no position on normative questions (for the most part). And I did branch out a little from economics, I guess, when I considered fairness.
Aside from fairness and efficiency, there isn’t really much else in the way of criteria by which to judge a policy.
May 27, 2007 at 7:42 am
Tom Evslin
First, Vermot is NOT planning to use any significant amount of taxpayer money for this. The bonds are REVENUE bonds which means that the infrastructure built with them must generate the income to amortize the principal and pay the interest. This is not to deny that the State is intervening in the allocation of resources but specifically to address the issue of “taxpayer money”.
Second, capitalism (of which I’m a firm adherant) has benefitted from government backing of infrastructure projects. Just to list a few: the Erie Canal, the railroads, the Panama Canal, farm-to-market highways, most airports, the NY Port Authority, rural electrification. Broadband connectivity is the necessary infrastructure of our times.
Third, the whole society benefits by moving to 100% availability of a new technology like electricty, highways, phone, or broadband. As long as any significant part of the population can’t participate, the technology can’t be couted on for service delivery or made a a basic part of education. A large part of Vermonts motivation in becoming an e-state with 100% adequate broadband coverage is to assure that both school curricula and the next generation of state and private service can be built on an assumption of broadband availability.
Finally, this is a much wiser use of state power than short-term tax incentives and the other ways that states usually compete to win economic development. Vermont is building a better infrastructure for businesses which move here – largely through private efforts but with some state involvement (and municipal involvement) as well.
May 28, 2007 at 8:58 pm
cdfox
Yes, you’re right. I was imprecise. Taxpayers will not directly fund Vermont’s e-state program. However, I assume the phrase “state-backed” means that the state is (taxpayers are) ultimately responsible for paying creditors. The new Vermont Telecommunications Authority would presumably have some (probably small) direct costs, as well.
Many of the projects you mentioned involve eminent domain, which I don’t think is much of an issue with building towers and laying fiber. So where is the benefit of the state’s involvement in this case?
To put it differently, why would telecom companies fail to make these investments in rural areas of their own initiative, if the investments are a good use of capital from a social standpoint?
I will assume that these companies want to maximize their profits. That leaves two options: the investments are not a good use of capital (and would a loss for society overall), or there is some sort of market failure so that the companies cannot profit from the benefits they create for society. In my post, I went over some possible market failures and concluded that they didn’t sound likely to me. Certainly, internet and cell phone services are excludable, and I don’t see a problem with inside information (like in the market for used cars).
I understand that broadband is important to people, which is why they’re willing to pay for it. That fact by itself shouldn’t motivate policy.
May 29, 2007 at 5:35 am
Tom Evslin
These are revenue bonds; not “full faith and credit”. They are backed and will be repaid only from the revenue produced by the infrastructure built with the proceeds. Therefore, anyone who buys the bonds must believe that there WILL be a payback.
Nevertheless, your question is a good one.
Private enterprise will and is building towers in the places where the economic case is best. The regulatory changes in the bill will make it easier and faster for all builders of towers to get the necessary infrastructure. The State will start at the other end – in the places where the economic case is worst; but, remember, there still has to be an economic case. The bonds have to be repaid.
The bond money the State raises is more patient than most of the capital available to private enterprise. Eventually, private enterprise will get around to building access everywhere rural as well as everywhere urban. For both social and economic development reasons, Vermont is not content to wait for that. Vermont wants to lead in broadband access and educations and services based on that. So we (the State) are raising the capital from private sources to do that.
As economic development policy, this is much more effective (and much less interventionist) than either issuing industrial development bonds for specific companies or giving targeted tax breaks.
Final point: the telecom market in the US is dominated by a cable-telco duopoly. It does not funtion well as judged by what we are provided for broadband access and what we pay for it compared to other developed (and some developing countries). Vermont hopes that by investing in the middle-mile infrastructure layer, it can encourage greater competition and more choice in last mile access.
May 29, 2007 at 6:21 am
Tom Evslin
I think you ask good questions which deserve answers so have posted an excerpts from our dialog http://blog.tomevslin.com/2007/05/why_should_the_.html
May 31, 2007 at 9:09 pm
cdfox
Thanks Tom.
I respond further to Tom here.
June 10, 2007 at 1:13 am
alumni stan
diffrent population, diffrent need, a lot of diffrences. If rural area has many information as a big city it would be redundance….