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The Value of Broadband and the Deadweight Loss of Taxing New Technology

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  • Austan Goolsbee

Abstract

With fixed costs of developing technology, taxes can generate large efficiency costs by slowing the rate of diffusion and these costs are not accounted for in conventional analyses. This paper illustrates this by analyzing the impact that taxes would have had on broadband Internet access at an early stage of its diffusion around the country, combining data on individual demand by area with data on supplier entry in those markets. Applying a tax to broadband in 1998 would have reduced the quantity and generate a large deadweight loss in the conventional model but when the analysis accounts for the fixed costs of entering new markets, taxes would have also delayed entry in several markets. In these places, the lost consumer surplus from delay is an additional deadweight loss and it more than doubles the estimated efficiency costs of taxation. The conventional model also dramatically understates the share of tax burden that would have been borne by customers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11994.

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Date of creation: Feb 2006
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Publication status: published as Goolsbee Austan, 2006. "The Value of Broadband and the Deadweight Loss of Taxing New Technology," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-31, April.
Handle: RePEc:nbr:nberwo:11994

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  1. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  3. Austan Goolsbee & Jonathan Guryan, 2002. "The Impact of Internet Subsidies in Public Schools," NBER Working Papers 9090, National Bureau of Economic Research, Inc.
  4. Trajtenberg, Manuel, 1989. "The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 444-79, April.
  5. Timothy F. BRESNAHAN & Peter C.REISS, 1994. "Measuring the Importance of Sunk Costs," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 181-217.
  6. Jerry Hausman, 1997. "Taxation by Telecommunications Regulation," NBER Working Papers 6260, National Bureau of Economic Research, Inc.
  7. Goolsbee, Austan & Klenow, Peter J, 2002. "Evidence on Learning and Network Externalities in the Diffusion of Home Computers," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 317-43, October.
  8. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  9. Jerry Hausman, 1997. "Cellular Telephone, New Products and the CPI," NBER Working Papers 5982, National Bureau of Economic Research, Inc.
  10. Austan Goolsbee & Amil Petrin, 2004. "The Consumer Gains from Direct Broadcast Satellites and the Competition with Cable TV," Econometrica, Econometric Society, vol. 72(2), pages 351-381, 03.
  11. Sumner, Daniel A, 1981. "Measurement of Monopoly Behavior: An Application to the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 1010-19, October.
  12. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
  13. Downes, Tom & Greenstein, Shane, 2002. "Universal access and local internet markets in the US," Research Policy, Elsevier, vol. 31(7), pages 1035-1052, September.
  14. Walter Beckert, 2005. "Estimation of Heterogeneous Preferences, with an Application to Demand for Internet Services," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 495-502, August.
  15. Donald Bruce & John Deskins & William F. Fox, 2004. "Has Internet Access Taxation Affected Internet Use?," Public Finance Review, , vol. 32(2), pages 131-147, March.
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  18. Jerry A. Hausman, 1997. "Valuing the Effect of Regulation on New Services in Telecommunications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997 Micr), pages 1-54.
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Cited by:
  1. Roberto Burguet & R. Preston McAfee, 2008. "License Prices for Financially Constrained Firms," Working Papers 351, Barcelona Graduate School of Economics.
  2. Ferrari, S. & Verboven, F.L. & Degryse, H.A., 2007. "Investment and Usage of New Technologies: Evidence from a Shared ATM Network," Discussion Paper 2007-035, Tilburg University, Tilburg Law and Economic Center.
  3. Mélisande Cardona & Anton Schwarz & B. Yurtoglu & Christine Zulehner, 2009. "Demand estimation and market definition for broadband Internet services," Journal of Regulatory Economics, Springer, vol. 35(1), pages 70-95, February.
  4. Pollock, R., 2009. "The Economics of Public Sector Information," Cambridge Working Papers in Economics 0920, Faculty of Economics, University of Cambridge.
  5. Pedro Pereira & Tiago Ribeiro, 2006. "The Impact on Broadband Access to the Internet of the Dual Ownership of Telephone and Cable Networks," Working Papers 06-10, NET Institute, revised Aug 2006.
  6. Austan Goolsbee, 2001. "The Implications of Electronic Commerce for Fiscal Policy (and Vice Versa)," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 13-23, Winter.
  7. repec:reg:wpaper:606 is not listed on IDEAS
  8. Nicholas Economides & Joacim Tåg, 2007. "Net Neutrality on the Internet: A Two-sided Market Analysis," Working Papers 07-14, NET Institute, revised Sep 2007.
  9. Prieger, James E. & Hu, Wei-Min, 2008. "The broadband digital divide and the nexus of race, competition, and quality," Information Economics and Policy, Elsevier, vol. 20(2), pages 150-167, June.
  10. repec:reg:wpaper:446 is not listed on IDEAS
  11. Victor Glass & Stela Stefanova, 2010. "An empirical study of broadband diffusion in rural America," Journal of Regulatory Economics, Springer, vol. 38(1), pages 70-85, August.
  12. Gao, Maija & Hyytinen, Ari & Toivanen, Otto, 2005. "Demand for Mobile Internet: Evidence from a Real-World Pricing Experiment," Discussion Papers 964, The Research Institute of the Finnish Economy.

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