Relations Between Public Policy Issues and Economies of Scale

Notions of economies of scale have always played a unique role in public policy formation, although most often implicity rather than explicitly. It is the cornerstone of the theory of natural monopoly and provides the primary justification for direct government regulation of telecommunications common carriers. The relations between the technical economic concept of economies of scale and current public policy issues in telecommunications are examined. The relationship between economies of scale and the traditional approach to regulation as a basis for understanding current policy conflicts between federal and state regulators is discussed. The theoretical economic concept of economies of scale, in contrast to concepts of short-run capacity utilization, economies of specialization, and economies of technological change is developed. The importance of time, uncertainty, and market characteristics in the measurement of scale effects is emphasized. Finally, the implications of economies of scale for current public policy issues in telecommunications such as the role of competition, cream skimming, and discriminatory rate reductions in response to competition are addressed.