Economists often seem enamored of economic efficiency, honoring its merits while decrying the lost benefits of inefficient outcomes. But really ... what's the harm in a little inefficiency? Well, the harm may be more real than we recognize. Take, for example, the notably inefficient pricing structure for access to the local telephone network The price of basic local telephone service is kept artificially low, supported by a complex web of mandated subsidies, including: 1) revenues from artificially inflated long-distance prices, 2) allocations between classes of customers (e.g., from business to residential), and 3) geographic rate averaging (e.g., high-density urban areas to low-density rural). This pricing system arose before competition (em to accomplish the goal of ubiquitous, reasonably priced telephone service. However, universal telephone service can now be achieved without mandated indiscriminate subsidies.
The Access Charge Subsidy
Telecommunications pricing relies intentionally on extensive interservice support to maintain a local exchange network available universally at reasonable rates. But the effort is inefficient.