Key opponent of ACP extension claims subsidy will inflate prices

A primary failure of U.S. advanced telecommunications policy and its fraught evolution is fostering a commodity market of “broadband” bandwidth. Its roots date back to the early 1990s and sluggish dialup connections over screeching modems. Faster, always on connections like DSL were dubbed “broadband” or “high speed Internet.” Going on three decades later, the terms are used to describe a commodity market of bandwidth sold in price tiers. Low “broadband speed” tiers are bargain basement offerings while the higher tiers offer luxury connectivity for those who can afford it.

This marketplace of broadband bandwidth developed due to the failure to timely modernize legacy twisted pair copper voice telephone delivery infrastructure to fiber. Legacy metallic delivery infrastructure like cooper and coaxial cable has far more limited carrying capacity and upgradability than fiber. Consequently, bandwidth per customer must be rationed. 

That drives what economists call price elasticity. Higher prices for higher bandwidth drives down bandwidth demand and vice versa, thus preserving limited bandwidth. This dynamic between price and demand is behind opposition to expanding the Affordable Connectivity Program (ACP), now expired temporary subsidy for low-income households:

Opponents remain unconvinced of the ACP’s benefits, however. In his opening statement before a Senate subcommittee last week, Republican Sen. Ted Cruz, the Senate Commerce Committee’s ranking member, criticized the FCC’s recent survey, which found that only 22% of households who have benefited from ACP did not have broadband. He argued, alongside witness Paul Winfree, the president and CEO of the Economic Policy Innovation Center, that the ACP has had an inflationary effect on internet prices.

“History has shown that when the federal government starts subsidizing demand in higher education and agriculture, the subsidy gets capitalized, and prices go up,” Cruz said. “After all, why would corporations ever leave free money on the table? Well, those who received the subsidy may realize that immediate cost reduction, the market prices rise for everybody else. This rising price creates a call for more subsidies and higher taxes to fund those additional higher subsidies and eventually a government takeover of the internet to provide it for free.”

https://www.route-fifty.com/infrastructure/2024/05/only-three-weeks-go-lawmakers-weigh-ways-save-federal-internet-subsidy/396339/

Cruz is essentially arguing subsidizing bandwidth as a commodity creates demand by lowering the price for bandwidth. Price elasticity holds that in turn will boost demand which Cruz says will encourage Internet Service Providers (ISPs) to increase rates for unsubsidized households in demand-pull inflation.