Services in regional Australia are often cross-subsidised by hiking up the cost of services to people in metropolitan areas.

Joshua Gans, Professor of Strategic Management at the University of Toronto, says the post office is a classic example of this. The cost of posting a letter across the country is subsidised by people paying the same price to have something delivered in their neighbourhood. Now the government is applying the same logic to the National Broadband Network — users in regional Australia will pay the same as everyone else, but people in the big cities will pay more than they would otherwise to cover the regional subsidy. Joshua Gans argues that less people in the cities will use the service because of the higher price.

So, is there a better way forward? Well one is to provide direct subsidy. You charge the real price where the cost is low, then offer government money where it is needed.

There’s a third choice, which is that the real price is charged for all services in regional areas, but people are given a cash bonus (or a tax break) for living there. That might also encourage more people to move to these areas, helping local economies to grow and reducing congestion in our big cities. Joshua agrees that this approach has a lot of merit, but is never done. He suggests people in the cities might not be happy about giving money to regional Australia, even though we are already through higher prices on cross-subsidised services.

First published on CBS News