The Fallacies of Government-Run Broadband – Pacific Research Institute

The Fallacies of Government-Run Broadband


There is no doubt that an effective broadband infrastructure is essential for the 21st century U.S. economy. This is why the misinterpretations of a recent Government Accountability Office (GAO) report are so problematic. The policy recommendations that are being derived from these incorrect interpretations, if followed, would significantly inhibit the growth and efficiency of the U.S. broadband infrastructure.

The GAO report compared “broadband services for 14 federally funded and municipal networks” to the broadband services in 14 communities that have not received government funding. According to the GAO report, the 14 federal funded or municipal network communities had faster speeds and wider availability. Cheerleaders for greater federal involvement in the broadband services, such as Congresswoman Anna Eshoo, erroneously concluded that “This GAO report confirms that when it comes to closing our digital divide, federal investment in broadband deployment has been pivotal to the success of America’s small businesses.”

However, the GAO report does not demonstrate what Representative Eshoo or others suggest.

First, the report was not designed to be used as the basis for policy recommendations. It offers no evidence that these 28 communities (14 federally funded, 14 not federally funded) are representative of either the typical government network communities or the typical private network communities. In fact, the GAO states in the report that “the results of our interviews cannot be projected to all service providers and small businesses”.

Second, the report does not account for the total costs associated with government-run networks. Unlike private-sector networks where private entities are providing the investment capital, government-operated broadband networks require consumers to pay for the infrastructure costs through taxes or fees. Therefore, the actual cost of a government-operated network, which should include the costs incurred by taxpayers to construct and operate the government-operated broadband networks, is much higher than a simple rate comparison implies.

By using taxpayer dollars, government-operated broadband networks are also creating cross-subsidization problems. The cross-subsidization occurs through many channels. For instance, the GAO report discussed the federal support that Monroe City Oregon received from the federal government, which is, of course, money from federal taxpayers.

As a consequence, private individuals and businesses in Monroe City, Oregon (with a median income over $36 thousand) effectively received taxpayer dollars from individuals and businesses in Monroe City, Louisiana, whose median income is 20 percent lower.[1] Transferring taxpayer dollars from one region to another always raises issues; but when those transfers are from individuals with less income and are used to finance private services, the cross-subsidies are even harder to justify.

The cross-subsidization problem does not disappear if the network is operated by a municipal government instead of the federal government. For instance, the GAO report discusses the municipal broadband network in Chattanooga, Tennessee that was built by the municipal electric utility. But, broadband networks built by municipal electric utilities embed the building and construction costs into residents’ electric bills. Such schemes, consequently, divert revenues from the electric utility’s ratepayers to users of the local broadband networks.

And then, there are long-run maintenance issues associated with government-run broadband networks. Like most infrastructure investments, broadband networks cannot be satisfactorily maintained by the initial capital investments. Instead, ongoing investments based on a sustainable growth plan are required. Government-operated networks tend to fail this test. These networks, especially the municipal networks, are often unable to meet additional capital commitments jeopardizing the long-term viability of the government-operated networks compared to private-operated networks.

Third, the role of government funding is dwarfed by the role of private capital in building and maintaining broadband networks. The nation’s broadband infrastructure has been developed, and continues to be driven by, private-sector investment. Since 2008, the federal government has authorized $15 billion in grants and loans dedicated toward broadband deployment. In comparison, private sector companies have invested more than $250 billion building and maintaining the nation’s broadband infrastructure in just the last 3 years.

The sheer expenditure discrepancy alone illustrates that it is private-sector networks, not federal investment, driving the success of America’s broadband infrastructure. The funding discrepancy also shows that the key to our broadband success will be policies that promote private investment and deployment.

The inefficiencies and cross-subsidy problems argues against government-operated broadband networks. And, this makes sense. Broadband providers compete vigorously against one another relying on different technologies and packages of services to provide consumers with the best services possible. Promoting this robust competition between private firms is the best path for ensuring that the U.S. broadband infrastructure remains vibrant and innovative throughout the 21st century.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

Scroll to Top