The air that surrounds us may appear empty, but it is full of information that travels across waves of electromagnetic frequency. Although we can see some of these frequencies—which we perceive as light— most of the electromagnetic spectrum is invisible to the naked eye. The imperceptible signals that traverse this spectrum make it possible for us to pinpoint our location using satellites and allow airline pilots to communicate with air traffic controllers hundreds of miles away. These signals also enable television antennae to receive video transmitted from local broadcasting stations. Spectrum is the medium by which our laptop computers and smartphones send and receive information wirelessly over the Internet. Simply put, life in the 21st century revolves around technology—and, in turn, technology revolves around spectrum.
We are surrounded by spectrum, but it is not a limitless resource. In a finite space, spectrum has the capacity to carry only so much information, while different frequencies—wavelengths—vary in their ability to travel long distances and penetrate buildings, trees, and weather. Although advances in technology have enabled spectrum to be used more efficiently, fitting more information into a smaller spectral footprint, demand for spectrum often outstrips available supply.
Deciding who will use spectrum and how matters a great deal in determining the extent to which consumers can enjoy the benefits of wireless communication. When no one has the right to exclude any other person from using a particular frequency, spectrum is likely to be overused, as everyone seeks to maximize his or her benefit from the airwaves without regard to the consequences for others. Conversely, when spectrum is restricted to users who are unable to make the most of their transmissions—or transfer their spectrum to those who can—the resource is likely to be underused. Underuse can be just as costly as overuse as it results in idle spectrum that someone could use productively.
This paper reviews the historical use of spectrum, including how governments have sought to oversee and regulate it. It then discusses how spectrum policy in the United States has adapted to technological evolution over the past century. Finally, it suggests how policy makers can achieve tremendous welfare gains by allocating spectrum through voluntary, decentralized markets.
Distributing the rights to use spectrum via markets incentivizes private holders of those rights to make efficient use of their spectrum and to invest and innovate in ways that increase the overall capacity of spectrum to facilitate the use of wireless devices. If a firm can lease excess spectrum to others, this will encourage it to make efficient use of its spectrum because it can profit from leasing out what it does not use.
Market distribution of spectrum also incentivizes innovation because inventing new protocols or more accurate sensors could reduce the amount of spectrum needed for an owner’s current use, and it can profit from leasing out the excess or adding additional customers. In short, the price system will accommodate changes in demand for spectrum.