Spectrum Favoritism Is Bad Economics

[Commentary] Economics has made significant contributions to public policy over the years -- free trade and airline deregulation come to mind -- but none more significant than the reform of the way governments allocate scarce radio spectrum. Spectrum allocations used to be political decisions. By the early 1990s, auctions became the norm in the US and around the world. The problem is that while auctions are inherently economic, not political, exercises, regulators and politicians can still exercise favoritism through the rules that govern how the auctions work. By imposing “set asides,” “bidding credits,” “spectrum caps” and similar provisions, officials can tip the scales in favor of politically popular interest groups. Such favoritism is usually defended by arguing that government should subsidize new entry into mobile wireless markets, which would otherwise be insufficiently competitive.

However well-intended, spectrum favoritism is bad economics, and has proven to be terrible public policy. Spectrum auctions have contributed to the extraordinary success of the mobile wireless business by taking politics largely out of the process and letting consumers, rather than regulators and politicians, pick winners and losers. They can continue to do so in the future, but only if regulators learn to resist the temptation to replace market incentives with regulatory largesse.

[Jeffrey Eisenach is a visiting scholar at American Enterprise Institute]