Peter J Wilcoxen > PAI 300 Economics for Policy Analysis

Weekly 5: Affordable Internet Service for Rural Areas

Due Tuesday 4/2

Rural areas in the United States have long lagged behind urban areas in access to high speed internet service because it’s more much more expensive to serve customers who are far apart. This lack of access became especially serious during the pandemic when a lot of teaching went online.

Suppose a county government with a mix of urban and rural areas decides to address the problem by requiring the local internet service provider (ISP) to adopt a cross subsidy policy. Initially, in the absence of the new policy, urban (U) and rural (R) customers are each charged the ISP’s WTA for serving them. As shown in the table of initial information below, those WTAs differ a lot:

Variable U R
Number of customers 100,000 1,500
Cost per customer (WTA) $40 $250
Demand elasticity -0.4 -2.5

The county would like to move to a single price for both groups. It would like the price to be low enough to increase the number of R customers substantially but high enough for the ISP to break even overall.

Please use the spreadsheet in Teams to evaluate the proposal and answer the following questions at the bottom of the sheet. As usual, fill in the green boxes with data and add appropriate formulas to all of the boxed cells except the blue one for Price 2, which will be used with goal seek. Here are some tips on how to fill in the cells:

  1. The Price2 cell will be used for the new single price charged to both groups. Set it to $40 as an initial guess.
  2. The Tax2 cells should be the different between the new price and the WTA for each group. They will be positive for the group that's taxed and negative for the group that's subsidized.
  3. The Rev2 should be the corresponding revenue raised from, or paid out, to each group. It will be positive for the taxed group and negative for the subsidized group.
  4. The Net Revenue cell should be the total of the revenue values from the two markets.
  5. Use Goal Seek to set Net Revenue to zero by adjusting the Price2 cell. This will find a single price for both markets that causes the ISP to break even on the policy.
  6. The CS section asks for the impacts on four groups: original urban users who stay in the market, original urban users who leave the market, original rural users, and new rural users. The Total `\Delta CS` row should be the total change in CS for the corresponding group.
  7. Answer the questions at the bottom.

Save and submit the results.

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 03/28/2024