In its technical paper justifying the awards, the Nobel Committee points out a major problem with using taxes to fund government programs: taxation distorts. The term economists use is “deadweight loss,” a loss that is not offset by a gain to anyone. Economists have estimated that raising $1 in taxes doesn’t cost society only $1; it costs somewhere between $1.17 and $1.56. The extra 17 to 56 cents is deadweight loss. The committee notes that by auctioning off major electromagnetic assets, the federal government avoided having to tax as much.
This isn’t to say that the ideal auction is one that maximizes government revenue. One way to maximize auction revenue is for the FCC to act like a monopolist and hold spectrum off the market. But what matters most is that spectrum gets into the hands of the most-productive users. As former FCC chief economist Thomas Hazlett, now at Clemson University, and his co-author Roberto E. Muñoz of the Universidad Técnica Federico Santa María have pointed out, the gains from efficient allocation swamp the gains in government revenue. The 2017 wireless spectrum auction, for example, redirected spectrum from broadcast television to cellphone companies. If you’re reading this on a cellphone, you can thank Messrs. Milgrom and Wilson.
This is from David R. Henderson, “Thank These Nobel Laureates for Your Cellphone,” Wall Street Journal, October 12, 2020 (October 13 print edition.)
Under my contract, I’m allowed to quote 2 paragraphs from my article. I’ll post the whole thing in 30 days.
By the way, as an economist friend pointed out on Facebook, I was one of the few to note the potential conflict of interest in Milgrom both helping design the auction and consulting to a company that bid in the auction. I responded that I wouldn’t be a good card-carrying economist if I hadn’t noted that. Economics is all about incentives. As I wrote in “Hooked on Economics,” Chapter 2 of The Joy of Freedom: An Economist’s Odyssey, I noted in all my reading of economics while a math major and then in all of my reading post-Bachelor of Science and pre-UCLA graduate school that the unifying theme was incentives.
Here’s the article on “Auctions” in David R. Henderson, ed., The Concise Encyclopedia of Economics.
HT to Alex Tabarrok and Lynne Kiesling for giving a quick read to my draft before I sent it to the Wall Street Journal. Also to my wife, Rena Henderson, for a quick edit. All of them turned it around in less than 25 minutes. Also thanks to Tom Hazlett for checking the paragraph on his findings. He did so while waiting to board a flight.