High-speed access to the Internet, or “broadband,” could be a tremendous boon to economic growth. In March 2004, the Bush administration made rapid deployment of broadband a national priority. The president asserted, “We ought to have universal, affordable access to broadband technology by the year 2007.” As state and national policies develop in response to this vision, it is important for policymakers to understand the costs and benefits of different approaches aimed at promoting the diffusion of higher-speed Internet connections.
Over the past few years, the broadband market has grown dramatically: The number of subscribers has increased by nearly 300 percent since 2000, prices have declined, and the speed of some services has increased. Nonetheless, there is room for further growth and improvement. Public policies can greatly affect how this market develops — for better or worse. The choices policymakers have before them include taxes and subsidies, incentives and price controls.
Policies should focus on the incentives for broadband suppliers to invest in network upgrades that extend service and improve quality and speed. State and federal regulators can help increase broadband penetration by eliminating any regulation of wholesale and retail prices and any policies that deter entry into these markets. Subsidies, meanwhile, should not generally be used to promote “universal” broadband service. They are likely to hurt the average consumer. If subsidies are required for political reasons, they should be offered only as one-time inducements to extend broadband into underserved areas. Likewise, a tax on access to broadband or on services delivered over broadband, such as Internet telephony, is likely to slow the spread of broadband and is also an economically wasteful way of raising revenues. Internet access or applications, therefore, should not be taxed. In short, the right set of policies will foster competition among suppliers and lower barriers to entry to the benefit of consumers in terms of both access and prices. Poor policy choices, on the other hand, though intended to improve access to broadband, could have the just the opposite effect.