On Monday The Oregonian reported on the potential demise of the free public Wi-Fi network in Portland. This is not terribly surprising, as economists have long recognized the public goods problem. I have blogged about the public goods problem before, most notably, perhaps, about the Sellwood Bridge, so I'll be succinct: it is hard to make money from public goods and free markets will provide too little of them relative to the socially optimal amount. The fact that MetroFi's business model was flawed suggests that they forgot to ask an economist about this problem. With free access, it is very hard to figure out a way to make the thing pay for itself. Of course, you could say the same thing about Google and yet they are thriving, but this success rests on the very nature of the web search - the learn a lot about you based on what you search for and can target advertising surprisingly effectively (it turns out). In economics, as a rule, information is gold.It seems to me that there are two important questions to ask at this juncture. One, is a private, fee-based network the way to go?, and two, is the public benefit of a publicly provided free network larger than the cost?
The first question: is public provision of this public good a good idea or should we just rely on markets? What is interesting about Wi-Fi is that it can be made in to a private good very easily and thus a market solution is possible. The problem with doing this is that it requires a large fixed cost investment in infrastructure (for a city-wide network) and is therefore likely to be only profitable for one company. This is what economists call 'natural monopolies.' Monopolists in general charge more than the competitive market price and provide less of the good. This is why telephone, power and cable monopolies were regulated - to counteract their market power. Market power also rests on the fact that you have a good that has no or few good substitutes and Wi-Fi may have a big one: internet service from cell phone providers. I am not a techno geek and do not know how long it will take for this to become as good as Wi-Fi, but my basic knowledge is that when the digital TV conversion is done the next generation of wireless communication systems will be ready to go to fill the space once occupied by analog TV signals. So it may not even be necessary to regulate even if the network went private. But it may not be profitable at all. If MetroFi has to charge a fee and few people want it, potentially because of competing wireless telecom based services, this business might not be profitable even as a fee based service. And even if it can be profitable, do we want really want a private network?
So this leads to the second question: is public Wi-Fi beneficial enough for Portland to provide it itself? It is possible; it could spur efficiency and productivity, lead to new investment and improve the connectedness and "web-literacy" of Portlanders (and especially kids) - a good skill for the 21st century. But the marginal benefit to free Wi-Fi versus private wireless phone networks is a question - but as many Portlanders would not be able to afford the wireless service, I think this marginal benefit woud be large. There is another factor, which is that the cost to cable and DSL customers should decrease with free Wi-Fi as the demand for these services should fall. I am inclined to believe, therefore, that the overall benefit to Portlanders would be well worth the cost, especially since Portland can amortize the investment cost very cheaply using municipal bonds. In other words, the city of Portland can probably borrow money at much lower rates than MetroFi to finance the building of the network.
So just because MetroFi's management and Portland's city councilors failed to study enough economics should not doom the system, Portland should take the lead and provide Wi-Fi for its citizens.
