A different way of thinking about Net Neutrality

"Net Neutrality" is the idea that internet service providers (ISPs) should not be able to prioritise some traffic over others even if they are willing to pay more. For example, Netflix cannot be charged more for its highly-demanded content than, say, BBC4. Or, looked at another way, people who watch a lot of Netflix cannot be charged more for the additional network congestion that creates than people who watch one programme a month.

ISPs can and do charge for total data downloaded – Net Neutrality refers to the bandwidth a particular provider and consumer use. With Net Neutrality, ISPs would not be allowed to create special 'fast lanes' for content like Netflix that users or Netflix itself could pay more for, with cheaper 'slow lanes' for content that is less bandwidth- and speed-sensitive (like this humble website).  

Many large internet content providers are pro-Net Neutrality, especially the ones that provide high-volume content. Many users are too, with websites like Save the Internet claiming that "The internet without Net Neutrality isn’t really the internet". 

I find this all quite odd – in my experience, absent the histrionics about 'saving the internet', most normal people are surprised that anyone objects to the idea of charging heavy users more.

Net Neutrality might best be understood as a redistribution from light users to heavy users. An enjoyable new paper from Keith N. Hylton attempts to explain the mechanics, and potential side-effects, of Net Neutrality by way of analogy – a toll bridge used by commuter traffic and heavy lorries. 

If the lorries add more congestion and do more damage, it would be efficient to charge them more so that they bear those costs. But what might happen if we banned that kind of discrimination?

Charging cars and trucks different prices would permit the bridge owner to internalize to truck owners the additional costs imposed by the trucks. This, in turn, would discourage the trucks from excessive use – for example, from imposing a marginal cost of $1 on the bridge owner and other users when the marginal benefit to the truck owner from the particular use is only $.50. A charge that varied with the intensity of the use would encourage truck owners to consider the congestion costs and the miles of wear and tear imposed in each relevant time period. The higher charge would also induce some truck owners to avoid the bridge in favor of another route. Over time, charges might encourage technological innovation toward trucks that carry the same freight while imposing lower congestion and depreciation costs.

Charging separate prices allows the bridge owner to reduce congestion and depreciation costs, and pass those cost savings on to consumers in the form of lower general prices (for an equivalent unit of service) for use of the bridge, which, in turn, would increase the total consumption of the services offered by the bridge.

Admittedly, in some cases the bridge owner might choose not to charge differential prices. Perhaps the differences in service costs are minor, and the administrative costs of differential pricing exceed the efficiency gains. Alternatively, perhaps trucks provide the greatest source of demand for new bridge capacity. Foresighted bridge owners would therefore be reluctant to tax a major source of industrial capacity growth. In these cases, the bridge owner may choose not to impose differential pricing even if completely free to do so.

The bridge analogy seems to apply straightforwardly to the net neutrality problem. Net neutrality is equivalent to prohibiting the bridge owner from using differential pricing, and generates similar costs. Some providers of internet content, such as Netflix, impose extraordinary congestion costs as a result of the internal subsidy from consumers of other internet services.

Hence, permitting the network owner to price differentially can and probably would enhance consumer welfare. To the extent that heavy use of the service has a depreciation effect (electrical components suffer wear and tear from use), similar costs are imposed.

The whole paper is very readable and enlightening, and you can read it here.