Pricing voice telephony services: Who is subsidizing whom?

Local exchange companies (LECs) have argued that, because of entry, they will no longer be able to subsidize residential exchange service. The available economic data show that residential service is not subsidized. This finding casts doubt over the need for entrants to contribute to a universal service fund that would be used to subsidize residential service. Since 1984 there has been a radical decline in the cost of providing voice services. The failure of the LECs to adjust their rates to reflect the cost decline explains in part why competitive access providers have entered the market.