prices, which in turn leads to inefficiencies that increase costs for all consumers. Finally, to the extent that the tax is based on arbitrary definitions to determine which providers will be taxed, how much they will be taxed, and which ones are eligible for support, the tax can alter the actions of the providers (including those of the SOE) so that they can either avoid taxes or gain access to subsidies. This creates further distortions that can lead to costly inefficiencies as well as restrictions on competition. $ ^{81} $

In determining the costs of providing the USO, regulators have naturally adopted different standards. In Australia, the costs of provision of non-standard service were excluded from the calculation. The Chilean regulator, meanwhile, allowed the USO to be bid out competitively. This was a useful exercise since a competitive bid generally applies downward pressure on costs.

As the population becomes denser, so the Post Office benefits from economies of scope and economies of density. It has been shown that as the number of delivery points increases, the number of letter-carriers does not increase (because the same letter-carrier can easily service those increasing areas). Hence, the USO does not lead to costs rising with delivery points, since the bulk of the costs are in the letter-carrier itself. Yet Post Offices often argue that increasing volumes mean increasing USO costs. This example shows that USO cost, far from being proportional to increasing volumes, may actually be inversely proportional to volumes depending on the precise spread of the delivery points.

### b. Auctioning off Reserved Sector?

One method of stimulating competition in postal would be to auction the reserved sector, as one auctions spectrum in the telecommunications world. The problem with this approach is that it is not clear who would actually make competitive bids, especially since there would have to be an obligation to service the less profitable markets as a condition of the auction. Still, Chile's telecom privatization stands as an example of a successful process in which the telecom reserved sector was assigned by auction to private sector bidders, which bids had the effect of allowing market forces to identify the minimum USO subsidy needed to provide service to the relevant areas.

Economists have considered the potential for franchise bidding particularly in rural regions. As early as 1968, Demsetz wrote about the concept of franchise bidding, but the concept dates from the 19 $ ^{th} $ century. $ ^{82} $ Franchise bidding requires the following: (i) Low sunk costs – many network utilities do not lend themselves to franchising because their sunk costs are very high, however the advantage in the postal sector is that sunk costs are modest; (ii) Severability of network elements—regional separation applies in the case of post or rail. Postal monopoly franchises could be awarded in different regions. The idea would be that these franchisees would have a franchisor-franchisee relationship with the Postal incumbent. Such a relationship would require monitoring for quality standards as would be the case with any franchise relationship. However, commentators have expressed the concern that there are significant transactions costs associated with franchise bidding which may make it less attractive.