ABSTRACT
One of the important goals of the Telecommunications Act of 1996 is competition in the local exchange. As this competition is introduced, traditional subsidies, explicit and implict, will most likely disappear. For example, geographic averaging created an arbitrage opportunity in urban areas, one that has been taken advantage of by entrants since the early 1990s. Competition brings pricing flexibility, so that one could expect implicit subsidies, like geographic averaging, to disappear. For policymakers, an important question is, "What happens to universal service as pricing flexibility is introduced?" A large impact on universal service would imply the need for a system of explicit subsidies to meet public policy goals.
