Friday, May 23, 2008

The dilemma with postal services

The mission of a postal service is to deliver and collect mail over all its attributed territory. But should it do so at a uniform cost to users?

Delivering mail in rural areas is much more costly than in urban ones. Yet in most countries, postal fee do not differentiate delivery areas, in fact they do not even distinguish distances, as long as delivery stays within the country. In economic terms, this is highly inefficient, as areas where delivery is easy subsidize areas where it is difficult. This encourages rurals to send and receive more letters than they should (for efficiency's sake).

Of course, the free market could circumvent that by offering at a lower cost delivery services in urban areas. This would erode the principle of uniform cost, and is thus banned in many countries by granting monopoly for postal services. This has been gradually relaxed, in particular for packages.

But why have this principle of uniform cost? Why encourage people living in remote places that are economically not self-sustaining? Is having economic development on all the territory a public good?


Patrick R. Sullivan said...

If development of all the territory was ever a public good in the U.S. it's long since passed (with the possible exception of Alaska). The only reason there even exists a Postal Service is that it's against the law to compete with them.

Independent Accountant said...

There's a problem with the cost of information here. Suppose we "zoned" first class stamps. Before the the internet, we would have needed a book 10,000 pages thick to figure out the postage to many locations in the US. Every letter would have necessitated a postage look up. When you mailed the letter, the post office would have to check the book to see if you affixed the right postage. Now we could just "google" the cost. If postage were "zoned", the USPS would need more detailed cost information to figure out how to price the mail. Overall, I don't think its worth the effort.

Vilfredo said...

The "dilemma" does not only apply to the tarification of delivery services, but also to the network of post offices. Many small village post offices are a net drain of resources.

Economic Logician said...

Independent Accountant, I see your point. However, ZIP code can easily be used to differentiate by distance. You may just look at the first digit and have a fee for within the digit, another for a difference between digits of less than 5, one for more than five. That would apply for the US, and presumably also elsewhere.

In some countries, there used also to be a within town tarif. In many places, you can still see letterboxes for in-town only.