Economic Analysis Of Building China's Telecommunications Universal Service Mechanism

Telecommunications industry is a representative of network industry. Scholarsdescribed its characteristic with four words: market power, asymmetric information,externalities and public good. According to economic theory, there exists marketefficiency in such an industry, which provides good reason for government regulation.Therefore, many countries have set up telecommunications regulation agencies andannounced various regulation policies, among which universal service is an importantone.Universal service means to provide basic telecommunications service to all peopleat an affordable price. In the era of monopoly, the monopoly firm is obliged toprovide universal service, and cross-subsidies are the primary sources of funding.However, in recent years, there is a deregulation trend in telecommunications sector,which in turn destroyed the cross-subsidies and made universal service unsustainable.Thus, it became a global issue on how to set up a new universal service mechanism ina competitive environment.As the largest developing countries in the world, China presents an interesting case.Since 1990s, its telecommunications industry has experienced several rounds ofreform that dramatically changed the market structure and regulation regime. As themarket became more and more competitive, its universal service faced a similardilemma, just as other deregulated countries. This paper investigates China'suniversal service in the context of market structure change. It has three importantpoints. The first, it regards network externalities, wealth redistribution and regionaldisparity improvement as key economic rationales for universal service provision inChina. The second, by combining economic models and China's practice, it concludesthat only universal service fund can be the solution in the long run. The third, throughintroducing Peruvian experience, it provides practical suggestions for China'suniversal service mechanism in the future.