Daily Policy Digest
Privatization Issues
January 31, 2003
"Transformation Plan" Will Increase First-Class Postage
The Postal Service reports a large percentage of its cost is overhead, which is apportioned more heavily to first-class mail than to other postal products. First-class mail is marked up 90.1 percent after the last rate increase -- more than twice the 43.9 percent average markup on other products and services.
Thus, first-class mail users are subsidizing other postal products, or at least required to carry a disproportionate share of the agency's costs.
- Although first-class mail accounts for 45.1 percent of the Postal Service's reported attributable costs, it is estimated to bring in 52.0 percent of total operating revenues and 62.8 percent of total operating revenues in excess of attributable costs.
- The Postal Service and the Postal Rate Commission (PRC), the independent federal agency that regulates postal rates, justify higher markups where demands are relatively insensitive to price -- notably first-class mail -- because the higher prices will not cause much decline in mail volume.
- Indeed, the Postal Service has long argued that insensitivity of demand to price should be the primary determinant when apportioning overhead costs.
- But giving it primacy would push the markup on first-class mail still higher and force first-class mail customers to bear an even greater share of overhead costs.
In the "transformation plan" it proposed in April 2002, the Postal Service asked Congress to change the law so it could adjust rates with less regulatory oversight. Granting the Postal Service that new power would likely result in a larger first-class mail markup and higher rates.
Source: Michael Schuyler, "Does First-Class Mail Carry Too Much Overhead?" IRET Congressional Advisory No. 141, November 2002, Institute for Research on the Economics of Taxation.
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