tutor2u™ econoMAX Supporting Teachers: Inspiring Students Special Feature: The Economics of a Public Good - Paying for the BBC

Geoff Riley (Eton College) evaluates the arguments for and against the public funding of the BBC

The BBC as a public good Broadcasting is a good example of a public good. Let us remind ourselves of the three main characteristics of a public good. Firstly it is non-rival, meaning that the consumption of a public good or service by one individual does not preclude consumption by another individual. Secondly, consumption is non-excludable. This means that consumption by one individual makes it impossible to exclude any other individual from having the opportunity to consume. Effectively the The BBC has been at the heart of broadcasting in the UK marginal cost of providing a pure public good to for many decades an extra user is zero, and this implies that, in order to achieve allocative efficiency, the charge for the Facing a broadcasting revolution product should be zero. Of course, in this situation, Which television channel would you choose if could private sector businesses are unlikely to consider have only one? According to research conducted in providing pure public goods because they will not 2004 by the industry regulator Ofcom, 12% of 16-24 be able to make any profit at a zero price, and many year olds would choose Sky Sports (they probably consumers can take a free ride on such goods because don’t pay for the subscription however!) and a further of non-excludability. 12% would choose Channel 4. Only 26% of young The provision of pure public goods is therefore a cause people would choose BBC1. of market failure. Left to the free market, public Every ten years there is a review of the BBC Charter goods are under-provided and under-consumed to consider how the BBC is performing and to discuss leading to a loss of social welfare. its future as a broadcasting organisation. In March We can see the nature of broadcasting as a public good 2005, the Government produced a Green Paper which using the following diagram: recommended that the BBC should continue to be funded by the licence fee – at a level to be set in the future. In this article we consider the nature of the BBC as a public good and consider briefly the alternatives to the licence fee as the BBC’s main source of funding. There is no doubt that the BBC (and ITV) faces enormous challenges as the broadcasting industry experiences a technological revolution. More than half the UK’s 25 million TV homes have access to multi-channel services such as Sky One and MTV, delivered via cable, satellite or the increasingly popular Freeview digital terrestrial service. There are real fears that in a few years time, the BBC will no longer be able to compete financially with the likes of Traditional analogue broadcasting differs from BSkyB as it seeks to become Britain’s most powerful encrypted digital broadcasting in the sense that broadcasting organisation. digital broadcasters can now exclude non-payers

Sources: OFCOM, Mori, BBC, Sky © Tutor2u Limited 2005 G Download this and other articles at www.tutor2u.net/economax tutor2u™ econoMAX Supporting Teachers: Inspiring Students The Economics of a Public Good - Paying for the BBC (continued) using set-top boxes. But even when Britain moves BBC television, radio and internet services at more fully to digital when the analogue signal is turned off than the current licence fee of £122. These are gainers in a few years, the broadcasting services will continue from the existence of the BBC. to be completely non-rival and it is this that really By contrast, the study finds that 6 million people matters in the context of the services that the BBC value the BBC at less than the current licence fee. provides. One extra person consuming programmes These are losers – they are paying more than the on BBC1 or BBC2 has no effect at all on the ability utility that they get and many such people may resent of people to consume other services provided by the having to pay the licence fee when they have paid for BBC. their Sky subscription and have already deserted the The licence fee debate BBC for other digital or commercial channels. The BBC study estimates that the net consumer surplus created At the moment, around 23 million households in by the BBC is well over £2bn/year, or 1⁄4% of GDP. Britain pay an annual licence fee of £122. All of these people are stakeholders in the debate about the future funding of the BBC and the vast majority use one or more BBC services at least once a week. The fee is a means of providing collective payment for a public good. We know that there are fee-dodgers who try to take a free-ride by avoiding payment, but there are well established although costly means to enforce the licence fee and take non-payers to court.

The most likely groups to think the licence fee represents good value for money for their household are those aged over 60 and those in the higher AB social groups. Groups more likely to think the fee represents poor value for money are those with multi- channel television access, people aged 31-45, people in the C2DEs social groups and younger people of 17 million households value BBC output at more than Black or Asian origin. People in C2DE social groups are the current licence fee far more likely to have an income below the median, Value for money and therefore the question of raising the licence fee becomes important because a sharp rise in its level The concept of value for money is important for would affect people’s ability to pay. economists. Many of you will have covered the idea of consumer surplus in your studies and the consumer But the pilot study itself sends an important surplus that we get from the BBC is a good example of statement that, for millions of people, the value that a theoretical concept brought to life! they derive from the BBC’s output does exceed the price they currently have to pay via the licence fee. According to research undertaken in a pilot study Would they be happy to pay a significantly higher last year by the BBC as part of the Charter Review, on fee in the future? Much would depend on the quality rough estimates, about 17 million households value and range of broadcasting that the BBC is able to

© Tutor2u Limited 2005 tutor2u™ econoMAX Supporting Teachers: Inspiring Students The Economics of a Public Good - Paying for the BBC (continued) deliver. Assuming a constant range, reliability and 3. The costs of collection and evasion are high quality of services, a large rise in the BBC licence fee including £150 million per year chasing licence-fee would reduce total consumer surplus. The BBC study evaders estimates that if the fee was raised by forty per cent from £122 to £170, up to four million people would Alternatives for funding the BBC? no longer value BBC services as much as the higher Several alternatives to the current BBC funding compulsory fee, consumer surplus would be reduced arrangement have been suggested: and the BBC’s services might end up being under- • Moving to a subscription base system (technology consumed. may allow this in the future) This, in a nutshell, is the argument against the • Allowing advertising and sponsorship of introduction of a subscription-based system for programmes similar to the ITV model funding the BBC. It would exclude several million people from consuming their services and would • Greater emphasis on selling BBC programmes probably result in a net loss of social welfare. overseas and sales of DVDs etc • Funding the BBC entirely through direct taxation and scrapping the licence fee • A tax on the revenues of other commercial broadcasters to part-fund the BBC’s services Of these alternatives, introducing advertising is least preferred among people surveyed. A sizeable majority of viewers (over sixty per cent according to a recent MORI poll) regard advertising as an intrusion to their enjoyment of programmes, and few think that the BBC should move to this form of finance. There are also worries that the total size of the TV Has the rapid growth in the subscriber base of media advertising market is not large enough to absorb the barnds like Sky Sports reduced the value of the licence entry of the BBC as a supplier of advertising slots. It fee? might well damage the financial viability of ITV for example. In any case, advancing technology now allows viewers to skip advertising when they have pre- Criticisms of the licence fee recorded programmes. Opponents of the licence fee argue that: On the whole, there is a preference for keeping the 1. It is a regressive form of taxation – everyone pays licence fee although there are concerns among older the same flat charge, regardless of their disposable groups about their ability to pay for it. income, the number of televisions they own or the However, without a sizeable increase in its value, extent to which they watch television in general and there is little doubt that BBC revenues will soon be BBC services in particular overtaken permanently by Sky and this will seriously 2. As fewer people watch the BBC, the case for damage the BBC’s ability to bid for live television a licence fee diminishes. Indeed as technology events including the rights for sports such as soccer, develops, it become even harder to sustain a cricket and golf. compulsory licence fee when people have moved In October 2004, Sky won the exclusive live rights to predominantly to alternative sources of information English international and domestic rugby union until through the internet, digital channels and their the end of the 2009/10 season. And in December mobile phones 2004, Sky won exclusive live rights to all international

© Tutor2u Limited 2005 tutor2u™ econoMAX Supporting Teachers: Inspiring Students The Economics of a Public Good - Paying for the BBC (continued) and domestic cricket in England and Wales from 2006 The BBC cannot hope or expect to provide an ever to 2009. widening or improving service unless alternative channels of funding are considered. At the end of the Sky’s target – eight million subscribers in day, it boils down to how much we as taxpayers and 2005 licence fee payers are actually prepared to pay for the Sky’s latest financial results make sobering reading traditional services of a public service broadcaster. for the BBC and ITV. In the final three months of In Their Own Words 2004, for the first time, the Sky Group generated over £1 billion of revenue during a single quarter. The “The BBC is a valuable public service – its programmes average annual revenue per subscriber last year was bring us real cultural and educational benefits. In a £387 (three times the BBC licence fee). world of proliferating media, it is a source of news and information that almost everyone trusts, and it On the 31 December 2004, the total number of direct- should remain so.” to-home digital satellite subscribers in the UK and Ireland was 7,609,000. Sky’s objective is to achieve Government Green Paper, March 2005 a target of eight million subscribers by 31 December We strongly support the continuation of the BBC as 2005. a public service broadcaster. However, we recognise The government has stated clearly in its Green Paper that the Licence Fee is a deeply unsatisfactory means that the licence fee is the preferred method of funding of paying for it. The Licence Fee is a regressive tax for the BBC in the years ahead. It believes in the which impacts most on those who can least afford principle of universal access free at the point of use. to pay. It is also costly to administer and is widely evaded. For the time being, it is difficult to see a But the commercial reality is that the BBC will have to realistic alternative. make some hard choices about the range of services that it provides. Even a big hike in the licence fee is John Whittingdale, Conservative Party unlikely to make much difference in the battle for sporting rights!

The BBC’s publically funded services Television Radio Other BBC 1 Radio 1 BBC Online BBC 2 Radio 2 World Service BBC 3 Radio 3 BBC Scotland BBC 4 Radio 4 BBC Northern Ireland Cbeebies Radio Five Live BBC Wales CBBC Five Live Extra BBC English Regions BBC News 24 1Xtra BBC Parliament 6 Music BBC 7 Asian Network 6 Nations services 40 local and regional services

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