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Public Good. Government ownership is explained by the existence of "public goods," where the marginal cost of providing this good to an additional user is zero, and where it is difficult or impossible to limit consumption of the good. Thus, a commercial firm has no incentive to produce this type of product. An example of a "pure" public good is national defense. Telephone service, once the network is in place, might also be considered a public good.


Incomplete Markets. Incomplete markets occur whenever markets fail to produce a good or service, even where the cost is less than what people are willing to pay. Telephone service to rural areas or even to low-volume residential users could be considered an incomplete market, because firms may not generate enough business to recoup their investment. Thus, governments have justified their monopoly of telephone services as a welfare obligation, with the ultimate goal of providing access to every citizen, or "universal service."


National Security. Keeping the communications infrastructure out of foreign ownership and in the control of the government was long considered vital for protecting the national security, especially in times of crisis or war.

Though it is overly simplistic to suggest that state ownership is inherently less efficient than private ownership, because of the large size of state-owned enterprises (SOEs), they tend to attract stakeholders who depend on the actions of the firm for benefits.1 The TO, for example, is often the largest employer in a country. Stakeholders include employees, suppliers, and the relevant government bureaucracies. Because the benefits they derive are significant, stakeholders have an incentive to organize in order to pressure the firm, and through this organization gain their power. Even though shareholders—namely the public—are the legal owners of the firm, they remain too dispersed to organize effectively. The stakeholders thus assume de facto control of residual rights. Governments are willing to maintain inefficient SOEs for fear of antagonizing powerful stakeholders, who are also political constituents.

TOs in many countries across Europe, Asia, Africa, and Latin America have clearly attracted strong groups of stakeholders, including labor unions, equipment suppliers, and the government agencies that direct the TO. The employees are concerned foremost with retaining their employment, while the domestic equipment suppliers often depend on the national TO for the bulk of their orders. The third stakeholder, the government, also has an interest in preserving the TO under state ownership. By setting high tariffs for long-distance use, and subsidizing shorter domestic calls, politicians garner public support. Furthermore, a profitable TO can be used to cross-subsidize other operations, such as the postal service. In essence, the policy of high tariffs for phone usage constitutes an indirect tax.2

A Changed Consensus

The question is why the consensus that supported the "natural monopoly" and state ownership of telephone services began to dissolve in the early 1990s. There are essentially three motivating factors:


Introduction of digital technology;


Privatization of SOEs around the world; and


Globalization of business.

The most fundamental driver for this trend is the revolution in digital communications technology. A government monopoly was easy to justify for a service that was fairly undifferentiated (i.e., basic phone calls) and for which demand was relatively inelastic. Furthermore, the provision of universal service was a legitimate goal of governments, given that private industry was unwilling to assume the cost of laying lines to every household. However, since the 1970s, telephone penetration no longer constitutes a legitimate measure of the effectiveness of the telephone company. With the introduction of enhanced services, including voice mail, toll-free calling, and the establishment of data networks, the diversity and scope of services have become much more important indicators of progress.

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