Hiding Handouts

Richard Thaler in the NYT:

Here’s a list of national domestic priorities, in no particular order:  Stimulate the economy, improve health care, offer fast Internet connections to all of our schools, foster development of advanced technology. Oh, and let’s not forget, we’d better do something about the budget deficit. … There [is] a way to deal effectively with all of those things at once, without hurting anyone. …

The usable radio spectrum is limited and used inefficiently. … The target that looks most promising in this regard is the spectrum used for over-the-air television broadcasts. … People in the industry refer to them as “beachfront property” … Over-the-air broadcasts are becoming a nearly obsolete technology. Already, 91 percent of American households get their television via cable or satellite. So we are using all of this beachfront property to serve a small and shrinking segment of the population. …  Professor Hazlett estimates that selling off this spectrum could raise at least $100 billion for the government and, more important, create roughly $1 trillion worth of value to users of the resulting services. …

Who would oppose this plan? Local broadcasters are likely to contend that they are providing a vital community service in return for free use of the spectrum. … [But] about 99 percent of these households have cable running near their homes, and virtually all the others, in rural areas, could be reached by satellite services. The F.C.C. could require cable and satellite providers to offer a low-cost service that carries only local channels, and to give vouchers for connecting to that service to any households that haven’t subscribed to cable or satellite for, say, two years.  Professor Hazlett estimates that $300 per household should do it: that amounts to $3 billion at most.

Yes, Hazlett’s solution would require poor rural couch potatoes to suffer the indignity of accepting more obvious handouts – today’s “free” tv better hides those handouts.  And yes we often pay substantial costs to show our allegiance to certain precious symbols.  But we pass up a trillion dollars of gains to avoid even the hint of dissing poor rural couch potatoes?

We forgo similar benefits when we let poor folk drive old very polluting cars, and then require expensive emissions reductions elsewhere, such as in power plants.  It would be far cheaper to ban old cars, and pay the poor more to compensate, but this also makes our handouts more obvious.

Couch potatoes and polluters are not exactly highly respected in our society.  So why is it that when such folks are also poor, we will throw away trillions in gains to avoid dissing them via direct handouts?

HT Alex.

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  • This trillion figure is an ass-pull, and government revenue from frequency auctions is another tax – ultimately paid by consumers, so I find it dubious there’s much benefit here.

    • First, Hazlett’s proposal is quite detailed. You haven’t provided any evidence that his numbers are wrong, just an off the cuff comment that the numbers are wrong.

      Second, although consumers are paying for a service, there must be benefit to the consumers beyond the costs paid to generate consumer surplus. According to Hazlett, “the total bandwidth set aside for terrestrial digital video broadcasting — 49 channels allotted some 294 MHz — is worth over $100 billion in
      license value and at least ten times that amount in Consumer Surplus.” Thus, consumers will pay a small amount and recieve great benefits.

    • James K

      Radio frequency is benign priced below its marginal costs so hell yes it should be “taxed” by auctioning off the spectrum. Hell, Coase did this work back in the ’70s, why are we still having this discussion?

    • anon

      The tax does not fall on consumers, it falls on the holders of de facto property rights on the spectrum. Yes, some of ths burden will be shifted onto consumers if these property rights are taxed, e.g. many non-profit TV stations may go out of business. But this is a separate issue.

  • gwern

    I would be interested to know whether countries which do not give rural areas disproportionate political influence (as the US does with its Senate) have auctioned off their frequencies.

  • mobile

    The frequencies for TV broadcasts have a limited range (~100 miles?), so a technologically feasible compromise would be to sell off the frequencies in urban areas first where cable penetration is already close to 100%, and where the frequencies have the most value.

  • mobile

    Also, when the networks are no longer transmitting over the public airwaves, won’t they be out of (or significantly out of) the purview of the F.C.C. ? What’s the consumer surplus for that?

  • Robin, I guess it’s poor rural couch potatoes, a bunch of Los Angelinos, and me:


    Since you’re interested in the far future, here’s a prediction: cable will be obsolete before over-the-air television broadcasting. Just a guess, but not completely uninformed.

    There’s a missing market with over-the-air broadcasting, so networks can’t recoup much of the consumers’ surplus if they are forced to bid for rights. But this doesn’t mean that cable is the more efficient technology. Digital broadcasts and powered antennas seem like a pretty good delivery system to me. But what do I know…

    • You’re an economist – do you accept the usual presumption that it is good to transfer resources to those with the highest willingness to pay? If so, what makes you doubt it holds in this case? That the status quo “seems pretty good”?!

  • What we need to assess is the aggregate willingness-to-pay of consumers and broadcasters, and we don’t know this because of the missing market. If broadcasters could contract with individual consumers of over-the-air signals, their willingness to pay may well be greater than those who would put the frequencies to other uses. My point is that we don’t have any prices to assess the willingness-to-pay of consumers for over-the-air signals. Right now the price is zero so the potential consumers’ surplus is very high. We need a measure of this to evaluate efficiency, and we don’t have one.

  • Rajiv, surely we usually presume that it is better if property rights exist so that products can be sold for non-zero prices, than the alternative of only as much quantity as a zero price can support. If we didn’t believe this we’d usually want to forbid anything but a zero price. Why is this product an exception to this usual presumption?

  • Robin, the zero price is pretty close to marginal cost once the signals are being broadcast anyway. I’m not sure this is necessarily a bad outcome provided that over-the-air broadcasts and amplified antennas result in the least cost method of producing a high quality (HD) product. The absence of a property right in the signal prevents broadcasters from capturing any of the consumers’ surplus and makes their auction bids uninformative with respect to overall efficiency. We could ignore this and just let the frequencies by used by those who do have the ability to contract individually with their customers. But it’s not obvious to me that this is a better outcome than trying to complete the missing market – for instance by taxing receivers and allowing broadcasters some use of frequencies at a price that is below the market clearing bid. The main point of my post was simply that the over-the-air product is now very good – much better than cable – and possibly even delivered more cost-effectively. And the stereotype of the poor rural user is fast becoming out of date.

  • Rajiv, should we really as a default prefer that zero-marginal cost of distribution products be given away for free? Yes, that might be best, it is not “obvious” it isn’t best, but that isn’t the question.

    • Robin, we currently have a default (for historical reasons) and the question is whether or not to change it and in what way. When folks talk about a trillion dollar free lunch who in their right mind would oppose that? I just wanted to point out that the “obsolete” and “dead” technology is very much alive, improved, and on the rise. Let’s just pause for a minute before jumping on the free lunch bandwagon to see how much this lunch would cost. It shouldn’t be too hard to figure this out. That’s all I’m saying.

    • anon

      should we really as a default prefer that zero-marginal cost of distribution products be given away for free?

      If the fixed cost of producing such goods can be financed by other means (such as subsidizing TV broadcasters), then yes we should. To do otherwise would exclude some consumers from enjoying the good for no apparent reason.

  • Jim Babcock

    My first thought with this is that it should be treated as an engineering problem, not an economics problem (though maybe that’s just my background). It seems to me that all television ought to be going over the Internet by now, and most airwave bandwidth ought to be used for providing Internet service. Providing a few television streams’ worth of Internet bandwidth to every home in the country at once isn’t trivial, but it’s not all that hard, either, and the fact many areas have failed to acquire the infrastructure to do so indicates a very serious market failure.

    • The Internet is a point-to-point communications protocol designed for duplex network connections. All messages have a source and destination IP address, and any IP address can send traffic to any other. Video broadcasting is a one-way multicast operation, so the technical requirements are fundamentally different.

      I mean, really, IP is nothing more than a routing protocol. With radio broadcast, you’re not doing any routing — your recipients are whoever can pick up the message. So using IP doesn’t make any sense. What would it gain?

      Of course, you could avoid broadcasting, and actually just use it as a big wireless Internet service. But that’s hideously inefficient. Why are TV shows are aired at particular times, and everyone has to watch at the same time? Because that way you broadcast one copy and ten thousand people can watch it. If everyone had to start up their own private connection, like how YouTube works, you’d have to be serving up ten thousand different copies, using ten thousand times the bandwidth at the edge of your data center.

      That will always be the case if you’re actually routing the data to separate addresses, and that’s the only situation where you need IP. So there’s no mileage in that.

  • Jim, I agree that in the long run most of the spectrum will be used for internet service, and that television will be part of this. As a bridge to this, I suspect that we’ll see a few channels of over-the-air HD broadcasts for some time. This is why I made the prediction (see above) that traditional cable will be the first to go.

  • dennis

    Note: Broadcasters had to be forced to buy equipment necessary for HD broadcasts.

    Also, I question the accuracy of Rajiv’s assertion that broadcast TV is better quality than cable. Where I live, the basic Comcast package offers the same channels in HD that I could watch if I connected rabbit ears (plus lots of other channels that I would not be able to receive over the air).

    • Dennis, I’m referring to picture quality, not number of channels. See my post for evidence on this.

  • Rich Rostrom

    Didn’t we just spend several $billion to convert television broadcasting to digital format?

  • Susan Lee

    “the fact many areas have failed to acquire the infrastructure to do so indicates a very serious market failure”

    (Fell into your site from Maggie’s Farm.) You’re making a big assumption about the value of broadcast TV. I don’t have TV and don’t intend to acquire it. If this is a market failure, it’s a result of of nothing worth watching…..

    Susan Lee

  • Cable Television obsolescence watch:

    ABC’s parent company switched off its signal to Cablevision’s 3.1 million customers in New York at midnight Saturday in a dispute over payments that escalated just hours before the start of the Academy Awards.

    Later in the same article:

    The signal can still be pulled from the air for free with an antenna and a new TV or digital converter box.

    Some of those who do this will notice an improvement in picture quality. They may not give up on cable just yet because the range of over-the-air programming is still quite limited, but they might start to wonder why they are paying so much for an inferior product.

  • LetUsHavePeace

    “The usable radio spectrum is limited and used inefficiently.” NOT There are enormous parts of the usable spectrum that are simply off-limits because they are owned by the Federal government. http://www.ntia.doc.gov/osmhome/allochrt.pdf
    The Federal government is the only entity that actually owns the airwaves. Everyone else gets a license, and those licenses are not freely transferable . This, BTW, explains why the sale transactions for cellphone companies, satellite broadasters, and radio and TV stations involve some of the most wonderful legal fictions ever created. The deals have, at their core, the transfer of the rights to use certain frequencies; but the value of those rights is never, ever directly referred to in the transaction sale documents. They are never given a price, not even zero. (This is yet another reason why parents should encourage their children who insist on going to law school to become FCC lawyers.)

  • AP

    “we will throw away trillions in gains to avoid dissing them via direct handouts?”

    Are you sure it’s the recipients of the handouts whose feelings we’re favouring? In my experience the people who complain most about handouts are the ones who aren’t receiving them.

  • I think there is severe underestimation of the massive difficulties of gaming the system with direct handouts. Moreover, I suspect it’s more often our outraged sense of unfairness (why should they get a handout) than the desire not to diss that causes a problem.

    In particular the problem is that either handouts are insufficent to offset the imposed costs for many people and as a result there a pile of horrific stories in the media about people who were screwed over by this government program or the handouts must delibrately over estimate the cost they impose to avoid failing to cover the costs and causing significant harm.

    However, when we give handouts that are highly utility positive to groups who we don’t feel need them it tends to invoke our sense of outrage.