The Economics of Universal Service: an Analysis of Entry Subsidies for Rural Broadband

Universal service is a policy objective that all individuals or households have access to some service. Subsidy policies to accomplish universal service may arise when private provision is non-universal. In the context of rural high speed wired broadband subsidies, this paper exploits household-level cable and satellite broadband subscription data from North Carolina to examine household adoption and substitution patterns and to evaluate how many currently unserved regions warrant an entry subsidy. This paper has three main findings: (i) fewer than 47% of households adopt high speed broadband in areas currently served by a single broadband provider, (ii) there exists a significant elasticity of substitution between high speed wired broadband and the lower speed options of satellite broadband and DSL, and (iii) a generous upper bound on the number of regions that warrant an entry subsidy is 67%. These results suggest a policy of universal service in North Carolina would be unlikely to achieve universal adoption, would connect many households already with internet access and who would not substitute, and in many regions would be prohibitively costly even assuming very generous estimates of the consumer surplus generated. From the perspective of social welfare, to connect the 5% least dense areas of North Carolina would require each adopting household value broadband access at more than $1550 per month.