Question

Explain why a market in which broadcast licenses can be purchased might be more efficient than having the \(\mathrm{FCC}\) assign licenses on some basis designed by the FCC.

Short answer

#Short Answer# A market system for purchasing broadcast licenses can be more efficient than a system where the FCC assigns licenses based on specific criteria. This is because a market system allows for an efficient allocation of resources, with licenses going to the highest bidder who values it the most. Broadcasters have strong incentives to utilize their licenses efficiently as a result of their investment. The market system also leverages information and knowledge of individual broadcasters about specific markets, leading to informed decisions about the value of licenses. In contrast, the FCC may lack such detailed market information, leading to possibly less efficient outcomes. Overall, a market system leads to a more productive use of licenses, benefitting consumers and the industry.

Step-by-step solution

Define the two systems

In a market system, broadcast licenses can be bought and sold between parties, allowing for efficient allocation of resources. On the other hand, if the FCC assigns licenses based on certain criteria, the allocation of licenses may be less efficient as the decision is made by a centralized entity.

Explain the efficient allocation of resources under a market system

In a market system, licenses will generally go to the highest bidder, who is willing to pay the most because they believe they can make the best use of the license. The dynamic process of supply and demand results in an efficient allocation of resources where licenses are allocated to those who value them the most.

Compare the incentives between the two systems

Under a market system, broadcasters have the right incentives to efficiently utilize their licenses since they have invested resources to obtain them. Failure to make profitable use of the license leads to the broadcaster losing their investment. However, in a system where the FCC assigns licenses, these incentives can be weaker as a broadcaster may not have the same level of commitment to using the license efficiently since they did not have to compete for it.

Discuss the issue of information in both systems

A market system relies on the knowledge and information of individual broadcasters about specific markets, which allows them to make informed decisions about the value of licenses. In contrast, the FCC, as a centralized entity, may not have the same level of detailed information about local market conditions or the ability to adapt quickly to changing market dynamics. This difference in information may lead to less efficient outcomes under the FCC assignment system.

Conclude with the overall efficiency of both systems

In conclusion, a market system for purchasing broadcast licenses might be more efficient than having the FCC assign licenses because it leads to a more efficient allocation of resources, provides better incentives for broadcasters, and leverages more accurate information about local markets. This results in a more efficient and productive use of broadcast licenses, ultimately benefiting the consumers and the industry as a whole.