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local public agencies as capital constrained

Please be specific.

You are the Chief Economist of the FCC. The Chairman has called you in to discuss a thorny issue. Two wireless broadcasters operate on adjacent frequencies. Operator A, complying with FCC rules, installs a new low-powered cellular architecture for its radio service at a cost of $1 billion to replace its old single high powered transmitter system. With so many transmitters, the handsets of operator B begin to receive interference in some circumstances. Both are complying with the conditions of their licenses.

There are several ways in which the interference could be mitigated:
1. Operator A could go back to using a single high tower transmitter
2. Operator B could replace its handsets at a net cost of $400 million
3. Operator B could install a new cellular architecture at a cost of $3 billion. It would receive benefits of $2.7 billion from doing so.
4. Operator A could move to a different band of spectrum at a total cost of $4.3 billion (including the cost of the spectrum) but it would also create a value of $3 billion by increasing the amount of spectrum available to operator B (or to be auctioned without any high power capability).

You are not a lawyer and do not know what legal standard would be applied. So, in preparation for your meeting, you need to consider what the outcome would be in two different cases:

1. Operator A has the right to continue transmitting.
2. Operator A is liable for the interference it causes.

Is there enough information to determine the outcomes? If not, state what additional information you would need to figure out what the outcome would be, and make assumptions about the information to come to an answer. Which of the three would be the best rule if the FCC has discretion?

What if it turns out that operator A is a profitable wireless company and operator B is really an amalgamation of 10,000 different local public safety agencies across the country who have come together to complain about the potential for loss of life if the interference is allowed to continue. Would that change your answers?

How would your answers change if you believed that the local public agencies were capital constrained and they could not fund new radio equipment?

Solution Preview

There are several ways in which the interference could be mitigated:
1. Operator A could go back to using a single high tower transmitter
If operation A goes back to using a single high tower transmitter then if the cost of new tower cannot be recovered the loss to A will be $1 Billion and the social cost will also be $1 Billion.
2. Operator B could replace its handsets at a net cost of $400 million
If operator B could replace its handsets then the social cost will be $400 million and the loss to B would be $400 million.
3. Operator B could install a new cellular architecture at a cost of $3 billion. It would receive benefits of $2.7 billion from doing so.
If operator B could install a new cellular architecture at a cost of $ 3 billion, and receive benefits of $2.7 billion then the social cost will be $3.0 - $2.7 billion = $300 million and the loss to B would be $ 300 million.
4. Operator A could move to a different band of spectrum at a total cost of $4.3 billion (including the cost of the spectrum) but it would also create a value of $3 billion by increasing the amount of spectrum available to operator B (or to be auctioned without any high power capability).

If operator A could move to a different band of spectrum at a total cost of $4.3 ...

Solution Summary

How would your answers change if you believed that the local public agencies were capital constrained and they could not fund new radio equipment?

$2.19