The government has recently announced the early stages of its Gigabit plan to deliver “ultra-fast” broadband to remote homes in the UK.
Originally, the scheme was supposed to support every home but was then reduced to 85% coverage. Despite this reduction, the budget remains at £5bn, with only £1.2bn being made available up to 2024.
Additional former voucher schemes are being released to provide immediate coverage for those on low internet speeds, with up to £210 million being made available.
The infrastructure project should start in 2022 and Prime Minister Boris Johnson supports the scheme stating it is "the rocket boost that we need to get lightning-fast broadband to all areas of the country.”
Individuals who were unable to use the internet effectively due to speed constraints will now be able to use it to its full potential with Gigabit broadband, increasing output per person as individuals can use the plethora of information on the internet to make better business decisions or to upskill. This will also increase the occupational mobility of labour as people broaden their skillsets.
Additionally, more individuals will be able to work from home. Due to COVID-19 some businesses, especially offices, may decide to continue operating from home environments to cut the fixed costs associated with renting large office spaces. This means, through the provision of Gigabit, more people can access work without having to physically travel or move to another city. Hence, this will increase the geographical mobility of labour.
The combination of an increase in the output per person, as well as increases in the occupational and geographical mobility of labour, will lead to an overall rise in the productive capacity of the economy, resulting in long-term economic growth.
This will increase the overall supply of goods and services within the UK, causing a fall in the general price level as output has increased. This will benefit those on fixed incomes, particularly state pensioners, as they will have increased buying power. This will raise standards of living across the UK as goods and services have effectively become cheaper.
However, is a government subsidy necessary for the UK to provide high-speed internet, and why has the free market not done so already?
Data from speedtest.net shows how the UK has been lagging behind in terms of internet speeds compared to other EU countries. The UK’s global ranking sits at 49th place, with average speeds of 84.54Mbps. Meanwhile, France, a country at a similar stage of development, sits in 10th place, with speeds doubling ours at 184.77Mbps.
So why is the UK so behind in internet speeds? Well, the UK broadband industry does not have equal competition.
BT Group, formerly known as British Telecom, is the largest broadband provider in the UK. However, before being privatised, BT was government-owned.
Through being able to establish control over certain regions in the UK, BT has become a natural-monopoly. The majority of internet infrastructure is owned by BT, meaning that most internet service providers such as Virgin Media have to rent lines from BT.
Due to there being a lack of alternatives, BT can charge higher prices for renting their services as demand is price inelastic. This has adverse effects on the consumer as companies such as Virgin Media are forced to charge higher prices for their products to account for the large costs of renting from BT.
For example, Virgin Media charge £50/month for 213Mbps internet speeds, meanwhile Orange, a French telecom service charges approximately £13.00 for internet speeds of 300Mbps in Poland.
And, because BT owns the majority of the lines, other ISP’s are also forced to take these larger costs meaning there are little cost-effective alternatives for the consumer, showing the monopoly power which BT has on the market.
Hence, the costs are being passed onto the consumer, leading to an inefficient allocation of resources as consumer satisfaction is not being maximised resulting in market failure.
Also, due to the Monopoly power which BT possess, they do not have to make large investments into innovation or improving their broadband as consumers have no other alternatives. This leads to decreased investment into improving internet speeds by the private sector as there is no incentive to do so.
So, the government must intervene to correct this market failure by subsidising the costs associated with investing in newer, better broadband.
Therefore, because of the existence of a natural monopoly, consumers lose as they experience slower speeds and higher costs, and, the economy also suffers as the monopoly power reduces the incentive for the free market to improve internet speeds, yielding no increase in the productive capacity of the economy, illustrating why the government has had to introduce a subsidy.