Network externalities - the economics of universal access

Privatisation of telecommunications across the globe over the 1980s and 1990s has thrown up various regulatory problems. There are many political and social reasons for governments desiring universal access; this paper sets these to one side to focus on the key economic rationale for having a more extensive network than might be forthcoming were private companies to operate on a profit-maximising basis without being subject to regulation. Welfare is increased by subsidising additional subscribers, since the existing subscribers enjoy benefits of an extended network that the marginal subscribers would not take into account when calculating private costs and benefits.