Home > Uncategorized > The Perils of “Net Neutrality”.

The Perils of “Net Neutrality”.

When it comes to “net neutrality” many conservatives focus on the potential of the FCC being able to regulate free speech in the vein of trying to provide “fairness” on talk radio. I prefer to focus on the economic effects of “net neutrality” and how it can only stymie the development of newer, innovative and better technologies, not only with broadband technology, but with internet content as well. I have made many comments regarding this, but I made a plethora of comments here. Now, we have a regulatory economist who essentially states that “net neutrality” would do more harm than good:

First, anyone who follows the scholarly literature on economic regulation generally knows that this form of regulation has a pretty checkered track record. In a wide variety of industries, economic regulation has increased prices, inflated costs, stunted innovation, and/or created shortages. In addition, because this regulation transfers enormous amounts of wealth – $75 billion annually in the case of federal telecommunications regulation — it creates enormous incentives for firms to lobby and litigate to bend the rules in their favor. While big corporations may feel they benefit from these expenditures, from a society-wide perspective the fight over wealth transfers is pure waste because it rarely produces anything of value for consumers.

Utility regulation works best in relatively stangant industries where a company makes a big capital investment, pays a few employees to run it, and doesn’t need to innovate much. In those kinds of situations, it’s easier for regulators and other outsiders to determine costs, set some rates that let the utility earn a reasonable rate of return, and keep the regulated company from gaming the system too much. If you think this describes broadband, well, good luck. A local water utility is probably the best example.

Second, anyone knowledgeable about the economic theory underlying utility regulation (which includes most economists who specialize in the area, and some lawyers) understands that regulation is supposed to be a last resort for “natural monopoly” industries where it’s cheaper to have one firm serve the entire market. A monopolist protected from competition could increase prices, degrade service, or do other things that increase its profits while harming consumers; economic regulation seeks to prevent those behaviors. But if competition is possible, competition is preferable.

When phone, cable, wireless, and satellite companies bombard us continually with solicitations to switch to their broadband services, and I can see multiple wires running down the street outside my house when I go up on the roof to adjust the satellite dish, it’s pretty darn obvious that broadband is NOT a natural monopoly, even if competition isn’t “perfect.” Therefore, broadband lacks a key prerequisite for public utility regulation to possibly increase consumer welfare. Indeed, the most anti-consumer results of economic regulation have occurred when government created monopolies, cartels and/or shortages by imposing this regulation on industries where competition is possible, such as cable TV, trucking, railroads, airlines, oil, and natural gas.

Third, recent economic studies find that the FCC’s decision to classify cable, DSL, and fiber broadband as a less-heavily-regulated “information service” generated a tsunami of investment and spurred competition. See, for example, this study by my GMU colleagues Thomas Hazlett and Anil Caliskan. Some more cites are available on pp. 17-18 of this comment to the FCC. If you don’t believe economic studies, just keep in mind that the aggressive marketing of dirt-cheap entry-level DSL tracks pretty closely with the FCC’s decision that DSL is an information service not subject to Title II regulation. Coincidence?

Not a coincidence at all. When you look at the industries that are the least regulated – technology, software development, plastic surgery, to name a few – innovations abound and products are priced so people of different groups can afford them. When you look at industries that are heavily regulated – automotive, healthcare, airlines – innovations are few and far between.

When net neutrality supporters go off the handle about how the telcos are robbing everyone and trying to censor content, they forget that the entity they are asking to regulate broadband is the same one which gave us Obamacare, affordable housing, and public education. Whatever the government regulates and controls, it destroys. If we want faster and more reliable speeds and innovative content, we need to keep the net free, not subject it to excessive regulation.

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