Question 1 747 words Executive Summary Over approximately the next nine years, the government owned corporation

National Broadband Network Co Limited will construct a high speed fibre optic broadband network at an anticipated cost of $36 billion (NBN Co 2011). The NBN will lead to future growth in Australian industries and greater competitiveness amongst retail service providers in the broadband market. However, it will create a monopoly in the wholesale market, as NBN will be the sole owner of a fixed communications network in Australia. Efficiency gains from the scale of the project may be offset by a misallocation of resources, but the NBN is overall based on a sound economic rationale.

Introduction The NBN is an enormous financial and political commitment for the government, and it is therefore expected to provide substantial economic benefits to Australia in the future. NBN Co (2011, p.2) is confident that its planned $36 billion high speed fibre optic broadband network will pay for itself over time. Analysis There are several major economic arguments for the creation of the publically owned NBN. Firstly, it will lead to improved productivity and international competitiveness in the Australian economy, as well as access to new markets locally and globally (NBN Co 2011). Euromonitor International (2010) also concluded that the development of the NBN will lead to major growth during the next decade, especially amongst industries providing online content or media and online retailers. The construction of the NBN is a capital expansion for Australian industries, which will reduce variable costs (Taylor and Frost 2009), and the effect of this infrastructure investment on firms is evident in Figure 1. Figure 1: Average total costs move from ATC 1 to ATC 2 as a result of capital investment

The decision for a single government owned enterprise to build the NBN has the economic benefit of achieving high productive efficiency due to the size of the project. This is because NBN Co and its chosen contractors will be continually improving their skills and efficiency over the 9 year lifetime of the project (Battersby 2011). This is known as economies of scale, and it is demonstrated in Figure 2. Figure 2: Economies of scale is when average total costs fall due as production increases

The fact that the NBN will be publically owned is positive because it will improve competitiveness amongst retail service providers. The NBN fibre optic network will replace Telstras current copper wire network, which means Telstra will no longer be in a position of competing in the retail market against its wholesale buyers (Bingemann 2011). NBN Co will offer all retail service providers the same rates and service, levelling the playing field and promoting competition (Battersby 2011). However, there are also significant economic arguments against the governments plans for the NBN. It appears that the wholesale fixed communications market will become a monopoly, with NBN Co expected to be the sole owner of a network in Australia by the time the project is finished (Battersby 2011).The NBNs aim to provide broadband service to all parts of Australia means that metropolitan areas will bear some of the costs of providing it to more remote areas. The government has therefore proposed laws to prevent other providers from cherry-picking, and providing cheaper networks in

metropolitan areas, which would severely damage the profitability of the NBN (Hepworth and Wilson 2011, p.1). These laws are anti-competitive, discouraging innovation and investment. The resulting monopoly would be inefficient as shown in Figure 3. Figure 3: A monopoly results in deadweight loss, or inefficiency compared to a competitive market

In addition, it can be argued that government enterprise has several disadvantages compared to private enterprise. The Organisation for Economic Co-Operation and Development (1998) notes that government ministers are often influenced by their responsibility towards their electorate, and often have few financial incentives linked to the success of the enterprise. More importantly, government spending often leads to allocative inefficiency because it provides services to at least some consumers who have no demand for them, meaning that resources would have been diverted elsewhere in a free market (Hazlitt 1979). Abbott (2011) argued that the opportunity cost, or best alternative forgone, of the NBN is high enough to indicate that the government should only build broadband infrastructure in the areas where it would not be provided by the private sector. Conclusion There are strong economic reasons for the creation of the NBN, which outweigh its flaws and suggest that it will indeed pay for itself over time (NBN 2011, p.2).

Bibliography Abbott, T. 2011, Full text of Tony Abbott's budget reply speech, The Australian, 12 May, viewed 19 May 2011, <http://www.theaustralian.com.au/national-affairs/budgets/full-text-of-tony-abbotts-budgetreply-speech/story-fn8gf1nz-1226054922105>. Battersby, L. 2011, The need for speed, The Sydney Morning Herald, 5 May, viewed 18 May 2011, <http://www.smh.com.au/technology/technology-news/the-need-for-speed-20110504-1e8he.html>. Bingemann, M. 2011, Telstras forced break-up delayed, The Australian, 26 April, viewed 19 May 2011, <http://www.theaustralian.com.au/business/telstras-forced-break-up-delayed/story-e6frg8zx1226044685976>. Euromonitor International. 2010, Technology, Communications and Media: Australia, viewed 19 May 2011, <http://www.portal.euromonitor.com.ezproxy1.library.usyd.edu.au/Portal/Pages/Search/SearchResults List.aspx>. Hazlitt, H. 1979, Economics In One Lesson, 3rd Ed., Crown Publishing, New York. Hepworth, A. and Wilson, L. 2011, NBN laws `create new monopoly' - TELSTRA'S BROADBAND WARNING, The Australian, 28 February, viewed 18 May 2011, Factiva, AUSTLN0020110227e72s0008t. National Broadband Network Co Limited. 2011, NBN Co Corporate Brochure, Australia. The Organisation for Economic Co-Operation and Development. 1998, Corporate Governance, StateOwned Enterprises and Privatisation, viewed 19 May 2011, OECD iLibrary. Taylor, J. and Frost, L. 2009, Microeconomics, 4th Ed., John Wiley & Sons Australia, Ltd, Australia.