Internet Economics

Needless net neutrality

In September, the White House Office of Management and Budget signed off on regulations that restrict the freedom of Internet service providers to manage web traffic. The Obama administration says the "net neutrality" rules, which were scheduled to take effect in November, are necessary to prevent Internet Service Providers from prioritizing data, or blocking services offered by competitors.

But a recent paper by University of Pennsylvania economist Gerald Faulhaber published in the journal Communications & Convergence Review suggests this threat is almost entirely hypothetical. Faulhaber notes that the Federal Communications Commission (FCC), which drew up the rules, admits they are "prophylactic." In fact, the FCC says the regulations are based on "longstanding openness principles that are generally in line with current practices and with norms endorsed by many broadband providers." 

Faulhaber writes that "one has to read the [report and order explaining the new rules] very closely to find any empirical support whatsoever that any of the suspect behaviors the FCC seeks to prevent have actually occurred." The commission cites just four cases, one of which was resolved before the FCC intervened and another of which did not result in a formal complaint. 

That doesn't mean the rules won't have an impact. Faulhaber's review of the economic literature concludes that "prophylactic net neutrality regulation is unnecessary and may well be welfare-reducing" because the costs it imposes by discouraging network development and infrastructure investment are greater than any benefits it might provide. The FCC's rules did not include an estimate of their economic impact.