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165 IRET Congressional Advisory 1 (2003)

handle is hein.taxfoundation/iretcgadv0162 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. December 11, 2003 Advisory No. 165 UNEVEN PRICE MARKUPS DISTORT POSTAL SERVICE MISSION Executive Summary The Postal Service prices its products above their production costs in order to meet overhead or common costs (i.e., costs not attributable to specific products). Products with steep markups bear disproportionately heavy shares of overhead costs while those with low markups bear light shares. Given the Postal Service's mission, how should markups vary across its products? Congress has assigned the Postal Service the mission of collecting and delivering non-urgent letters throughout the nation at reasonable standardized rates while maintaining relatively uniform service. In light of that mission, the Postal Service should price its core products - of which the most important is first-class mail - as close as possible to their costs of production, and reserve higher markups for non-core products. By doing that, the Postal Service could lighten the burden on those products whose use it is supposed to facilitate. In fact, however, the markup is high on first-class mail (nearly double production costs) and much lower on most peripheral products. These unequal markups place a disproportionately heavy burden on first-class mail consumers, contrary to the government agency's mission. In fiscal year 2002, the markup on first-class mail, which is the Postal Service's main product and at the heart of the postal monopoly, was 87.6%, and that on standard mail, which is the Postal Service's next biggest product and also sheltered by law from direct competition, was 48.2%. Markups were relatively low on most other products. For example, the markup was negative (a loss) on periodicals, negative on e-commerce products, 8.5% on package services, 20.5% on international mail, 30.9% on priority mail, and 74.5% on express mail. The pattern of markups at the Postal Service is the opposite of that at many private-sector businesses in regulated markets, where core service are made more affordable by setting higher markups on optional (often premium) products than on basic service. The Postal Service claims overhead accounts for a surprisingly large share of its costs, about 40%. The agency calculates that its non-core products cover their own costs, but not by much. However, if some product-specific costs are incorrectly labeled as overhead, non-core products may actually be losing money and receiving cross-subsidies from first-class mail customers to cover the losses. In considering proposals for Postal Service reform, two worthwhile objectives would be reducing the current unevenness in markups across products and taking steps to be more confident that product-specific costs are not miscategorized as general costs.

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