Review of Network Economics 2012/11: Should Publicly Funded Postal Services be Reduced? A Cost-Benefit Analysis of the USO in Norway

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Forfatter(e)	Simen Pedersen Henrik Lindhjem
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Volume
11,Issue 2 2012 Article3
Review of Network Economics
Should Publicly Funded Postal Services be Reduced? A Cost-Benefit Analysis of theUniversal Service Obligation in Norway
Henrik Lindhjem, Vista Analysis & Norwegian Institute for
Nature Research
Simen Pedersen, Vista Analysis
Recommended Citation:
Lindhjem, Henrik and Pedersen, Simen (2012) "Should Publicly Funded Po\
stal Services be
Reduced? A Cost-Benefit Analysis of the Universal Service Obligation in \
Norway," Review of
Network Economics : Vol. 11: Iss. 2, Article 3.
DOI: 10.1515/1446-9022.1345 
©2012 De Gruyter. All rights reserved.Authenticated | henrik.lindhjem@vista-analyse.no	Download Date | 6/18/12 3:50 AM

Should Publicly Funded Postal Services be
Reduced? A Cost-Benefit Analysis of theUniversal Service Obligation in Norway
Henrik Lindhjem and Simen Pedersen
Abstract
We conduct, to our knowledge, the first cost-benefit analysis of the universal service
obligation (USO) in the postal sector. Three alternatives are analysed that reduce delivery frequency
and/or delivery speed, with particular emphasis on quantifying the potential loss of consumer
benefits. Social cost savings are analysed for the service provider, for the environment and for the
government through lower levels of distortionary taxes. Although there are challenges involved in
measuring the net welfare change, especially loss in consumer benefits, our results suggest that only
the largest reduction in the USO may be justified on social efficiency g\
rounds.
KEYWORDS: post, universal service, cost-benefit analysis, contingent valuation
Author Notes: We are grateful to professor Ståle Navrud for comments to the design and analysis
of the contingent valuation survey, to Aleksander Møll, Tarjei Weseth and Kristin Bergum for
assessment of costs, and to Karin Ibenholt for valuation of the environmental externalities. The
article does not represent the views of the Norwegian Post and Telecommunications Authority or
Norway Post.Authenticated | henrik.lindhjem@vista-analyse.no	Download Date | 6/18/12 3:50 AM

1. Introduction 
Due to trends like urbanization, ma rket liberalization and electronic 
communication, and the current urgency of fi scal austerity in Western countries, 
the desirability of maintaining the level of the universal service obligation (USO) 
in the postal sector is increasingly be ing questioned (Cremer et al., 2008). The 
USO involves an obligation to supply pos tal services at a determined delivery 
frequency and speed at an affordable pr ice across the service area (usually a 
country). The universal service, traditi onally provided by a monopolistic public or 
regulated operator, has been justified by network externalities, redistributive and 
regional policy objectives a nd the provision of an important public good (e.g. 
Cremer et al., 2001). While the need for monopoly protection has been criticized 
for many years, the rationale for the USO has until recently remained relatively 
unchallenged by regulators (Cremer et al., 2008). 
It is likely that the USO still provides substantial social benefits in many 
countries (The Urban Institute, 2010), but ar e the benefits of the current level of 
the USO higher than its costs? What is the optimal social trade-off between 
service levels and costs? Several c ountry governments and regulators are 
currently grappling with these questions . The literature has studied a range of 
issues of relevance to the postal ma rket, especially optimal regulation, 
liberalization and competiti on, and estimation of cost and public financing of the 
USO (see e.g. Calzada, 2009, Crew and Kleindorfer, 1998, Panzar, 2000, \
Rodriguez and Storer, 2000 and the recent special issue of Review of Network 
Economics 10(3), 2011). However, comparativel y little attention has been paid to 
estimating benefits and costs of universal postal services to their users to better 
evaluate the effectiveness and viability of current USO policies. In practice, the 
most relevant issue facing regulators and policy-makers is not to abandon the 
USO altogether but to consider gradual changes (reductions) in the level and 
quality of services. Recently, several pa pers point to the importance of more 
research related to this question, esp ecially quantification of the (loss of) 
consumer benefits (see e.g. Cremer et al., 2008, Swinand and Jones, 2006, The 
Urban Institute, 2010). The aim of this paper is to estimate and compare the changes in economic 
benefits and costs of three alternatives currently discussed to reduce the delivery 
frequency and/or delivery speed requiremen ts of the USO in the postal sector in 
Norway. The analysis is based on a study commissioned by the Norwegian Post 
and Telecommunications Authority (NPTA) (Pöyry and Vista Analysis, 2011). To 
estimate the potential reduction in social benefits among households we use a 
large, nationally representative continge nt valuation (CV) web survey utilizing a 
national probability-based web panel of willing respondents. A smaller telephone 
survey of small and medium sized enterp rises is also included. The CV method 1Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
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was originally developed to derive willingness to pay (WTP) estimates to 
determine the socially optimal provisi on of unpriced, non-market environmental 
public goods (Arrow et al., 1993, Mitchell and Carson, 198 9). However, CV and 
its methodological cousin in the stated preference family, choice modeling (CM) 
(with its roots in market research and tr ansport choice analysis), are increasingly 
being used to quantify the social bene fits of other government-provided public 
and quasi-public goods and services, su ch as for example public service 
broadcasting (Delaney and O'Toole, 2004) , public libraries (Aabo and Strand, 
2004) and water services (Echen ique and Seshagiri, 2009). 
In the postal and network economics literature such stated preference 
applications are still rare. Marketi ng studies have looked at consumers’ 
preferences for service quality and attribut es, also in the postal sector, but these 
studies have rarely been designed to quantitatively measure service values to 
inform cost-benefit analysis (CBA). Reay (2002) reviews a few of the\
 early 
marketing studies.	
1 Four recent studies have qualitatively discussed or attempted 
to quantify the social benefits of postal services, in light of the current public 
debate about the claimed need to downs cale the USO in several countries. In the 
UK, NERA (2009) investigates the social value of the post office network and 
NERA and RAND (2003) the value of the rural post office branches. In the US, 
the Urban Institute (2010) developed a framework for analyzing the social value 
of postal services, but does not actually conduct a stated preference study (though 
they recommend this as a next step). Most recently, the European Commi ssion funded a study investigating 
methodologies to better measure consumer preferences for postal services, where 
the main aim was to monetize consumer benefits (Rand Europe, 2011). Although 
stated preference methods may be a useful tool to quantify social benefits, there 
are also several challenges involved in their application. We discuss the most 
important ones of potential relevance beyond the postal sector to other publically 
provided network and related services. For comparison with the economic benefits, we estimate the cost 
implications for the Norwegian postal service provider (“Norway Post” – NP) 
using their own cost model. Further, we explicitly quantify potentially lower 
transport-related environmental externality costs that are not already internalized 
(e.g. through levies on tran sport fuels paid by the NP). Finally, we quantify the 
costs of public funds from raising tax re venues for compensation of the USO. To 
our knowledge, this is the first CBA of ch anges in the postal USO in any country. 
The paper is structured as follows. In the next section we briefly present 
the basic theory of costs and benefits of postal services and explain the 
components that will be quan tified. Section two first gives a brief description of 
 	
 	1 Swinand and Jones (2006) use an alternative rev ealed preference (hedonic pricing) approach to 
estimate the WTP for quality of service in post. 2Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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the current USO requirements and the alternative service levels for analysis. The 
Norwegian postal market nicely illustrates typical postal market dilemmas: 
particularly high transport and distribu tion costs and high environmental impacts 
due to long travel distan ces and scarcely populated ar eas. Further, the methods 
used to quantify both costs and benef its and the underlying assumptions are 
explained in detail. Section four then goes through the results, compares costs and 
benefits and investigates the sensitivity of the results and the derived decision 
rule. Although there are chal lenges involved in measuring the net welfare change, 
especially the loss in cons umer benefits, we find that just one of the proposed 
reductions in the USO may be justified on social efficiency grounds. Section 5 
concludes. 
2. Theoretical framework 
2.1 Cost-benefit analysis and the decision rule 
The cost-benefit framework implies ranking policy options from an economic 
point of view, taking account of both benefits and costs of the policy to society. In 
the case of postal services both the bene fits and costs depend most importantly on 
the quality of the service (such as delivery frequency and speed etc.) and quantity 
consumed (see e.g. Crew and Kleindorfer, 2002). As pointed out by for example 
Boadway (2006) the decision rule in an in tertemporal context is the present value 
criterion implying that the pol icy-maker should set a quality level of the USO that 
maximizes the present value of the future stream of net benefits of the obligation, 
as given in equation (1): 
: 1 ;
 /=T	
� 9 
L: 
]
� F $	�:
O, M ;

F%	�:O, M ;
: 1
EN ;
�	G	
�
�@5

a 
where r is the social discount rate, s is a vector of different quality 
parameters of the service obligation, q defines the quantity of postal services 
consumed and T the time period of the policy. Assuming that the social benefit 
function $	
� is concave and the social cost function %	� is convex in both its 
arguments, the first-best optimal choice is the service level at which the marginal 
social benefits are equal to the marginal social costs. This assumes equal welfare 
weights across the population. In our case an d in most practical policy contexts 
relatively small changes from the cu rrent (and usually sub-optimal) policy 
situation is the norm. The changes in th e USO considered in the Norwegian case 
include three alternative small (but non-marginal) changes to the delivery 
frequency and/or delivery speed requireme nts of the USO. Hence, the welfare 3Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
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change :∆W	
g; from the current situation for a given USO alternative i, can be 
expressed as (where the time dimensi on now is suppressed for convenience): 
 :2; ∆W	
g
L∆B	g
F∆C	g 
Alternative i is preferred on economic e fficiency grounds invoking the 
Kaldor-Hicks compensation principle, if and only if ∆W	
g
P0. Note that for the 
alternatives considered both costs and be nefits are generally expected to be 
reduced. When evaluating the thre e alternative service levels i, j and k, they can 
be ranked in descending order by the size of welfare increase. 
2.2 Reduced benefits and willingness to pay (WTP) 
The USO in the postal sector is genera lly seen as an important public good for 
many reasons. The existence of a functi oning postal network that “binds the 
nation together” is important for a working democracy and it is by many 
considered unethical to exclude anyone from essent ial communication services 
(Cremer et al., 1998). A recent study from the US divides the types of benefits 
into eight categories: consumer, business, safety and security, environmental, 
delivery of other governmental services, in formation exchange, social linkage and 
civil pride and patriotism (The Urban In stitute, 2010). A significant share of the 
likely benefits may stem from the mere existence of a functioning network, 
independently e.g. of the extent of use of the service level itself. The positive 
preferences people may hold for public goods they do not themselves intend to 
use is sometimes termed non-use or existence value in the literature (Freeman, 
2003). There is also the option value re lated to potential future use. 
The social value of the total stream of benefits can be defined and captured 
by the beneficiaries’ willingness to pay (WTP) for the USO services. Building on 
Reay (2002) and Crew and Kleindorfer (1992), let q(P,s) be the demand for the 
service at a price P and service quality level s . q(P,s) is the solution to the 
optimization problem [V(q, s) – Pq], where V(.) is assumed concave or linear in 
both q and s. For a constant posted volume, q, the function V(q,s) represents the 
WTP for different levels of service qua lity. Expanding this framework slightly 
and applying it to a change in the service level s from the reference state-of-the-
world ( R) to some target state (T) with an alternative (lower) USO level, WTP 
may be defined by:	
2 
: 3 ;
 8	
�
k2	��,;�
F962;M	��,O� �,57$	� �,*	�,+�
o
L8	�
k2	� �,;�;M	��,O� �,57$	� �,*	�,+�
o
 
 	
 	2 Adapted from Bergstrom and Taylor (2006). 4Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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;	
� is household income of individual 
j, 57$	�	is a measure of substitutes 
for the postal services, *	
� is non-income character istics of individual j’s 
household, +	
� a measure of information available to individual j	3, and q, s and P as 
defined above. Solving this equation for WT P (which is identical to the change in 
benefits from equation (1), ∆$	
�) yields: 
: 4 ;
 ∆$	
� 962 
LB:2	��	
F2	��,M	��
FM	��, O	� �	
F O	��, 57$	��	
F 57$	��,*	�,+�;
 
WTP is increasing in s. When assuming constant prices, quantity levels 
and measures of av ailable substitutes	
4, (3) and (4) define WTP, the amount that 
can be subtracted from the individual’s in come so that he is indifferent between 
the current USO level and a reduced alternat ive service quality level. As stated by 
Reay (2002), WTP for postal service qu ality changes can be estimated by 
“consumer surveys”, in our case the CV me thod. Note that we are interested in 
service quality reductions, where the th eoretically correct measure would 
arguably be the consumers’ willingness to accept compensation (WTA) to forego 
the current service level and remain at the same utility level as before the change 
(Freeman, 2003). This welfare measure is the compensating variation. However, 
since the WTA is not bounded by the consum er’s income constraint, typically 
yielding disproportionally high statements of WTA, this measure is normally not 
used in practical CV applications (Bateman et al., 2002).	
5 
Although individual consumers are lik ely the most important when 
considering the value of the USO as a pub lic good, they are of course not the only 
beneficiaries. Private firms and public sect or institutions at various levels use and 
rely on postal services. In principle, firms may be aske d to assess and state their 
WTP to avoid service reductions in a similar way to private individuals – 
reflecting the value of the service levels to their businesses. Alternatively, their 
benefits of sending could be measured more conventionally, e.g. using areas 
under mailer demand curves. In contrast to small and medium sized enterprises 
(SMEs), larger companies often have separate, dedicated mail systems for internal 
communication. 
 	
 	3 The information available to consumers is rarely perfect, and hence it is important to consider the 
amount and type of information available to individuals when valuing public goods (e.g. 
information given in a questionnaire as discussed subsequently). 
4 We return to a discussion of some of these assumptions. 5 Respondents also tend more often to protest against the concept of compensation for reduction in 
a public good. For these reasons, WTP to avoid reduc tions in service quality levels (the so-called 
equivalent variation) is used instead, though this measure may also, as we shall see, not go free of 
protesting behaviour among respondents. As discussed by Hanemann (1991) the difference 
between WTA and WTP depends importantly on available substitutes (the fewer substitutes 
available for the public good, the greater the disparity). 5Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
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In a similar way to larger businesses, public sector entities to some extent 
also have dedicated mail systems for internal communication. Household WTP 
should in principle capture at least a pa rt of the service loss related to public 
external communication. Further, to a larger extent than for the private sector, 
some of the USO service reductions cons idered would perhaps not result in 
substantial changes to normal mail deli very from public sector institutions to 
households.	
6 
Our main emphasis here is on the potenti al reduction in welfare benefits to 
the public at large. Hence, our main effort has been put on quantification of the 
WTP of households. In addition, we try to approximate the WTP for SMEs. It is 
methodologically complex to estimate im plications for large companies and 
public sector institutions, hence we si mplify by excluding these from further 
analysis. This approach measures the se nding and receiving benefits of individual 
and SME mailing, but not the sendi ng benefits of large mailers.	
7 These are the 
same main beneficiary groups also c onsidered by NERA (2009), while Rand 
Europe (2011) also includes a small samp le of large businesses. This approach 
can be seen as conservative, as a fu ll CBA in principle should also include 
sending benefits for large mailers. 
2.3 Cost savings from reductions in the USO 
The aim is to identify the changes in so cial costs for different USO quality levels. 
In principle the potential welfare gains induced by the reduction in costs from 
downscaling the USO level consists of thre e elements. First, a reduction in the 
service level will free up input factors, th e most important of which are labor and 
capital. The release of these resources onl y represents welfare gains as long as 
they have an alternativ e value in the economy. 
Second, the postal sector affects the environment through for example 
CO	
2- and other emissions due to road and air transport. A reduction in the USO 
burden therefore has th e potential to reduce such environmental externalities, as 
an alternative to Pigouvian pricing, wh ich is difficult under expectations of 
uniform prices (see e.g. Boldron et al., 2011).	
8 
 	
 	6 One of the changes we examine is excluding mail delivery on Saturdays, which is not very 
relevant to many public sector institutions. In addition, public sector may be bound by certain 
response time requirements that would not change. 
7 In our study for NPTA, we did include a small sa mple of larger mailers that were investigated 
more qualatively through telephone interviewing. Ho wever, we did not end up trying to quantify 
their loss from service changes, due to the small sample and methodological challenge in eliciting 
meaningful WTP estimates from large fi rms (see Pöyry and Vista Analysis 2010). 
8 To the extent that such externalities are no t already internalized through taxes on energy, 
transport fuels and ot her input factors. 6Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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Third, lower USO requirements could reduce the extent of unprofitable 
postal services in the reserved, monopoly area of the operator. In the Norwegian 
case the USP burden of the USO is meant to be (partly) offset by the surplus from 
the reserved area and if this surplus is insufficient, by a compensation from the 
state (see Bergum, 2008). Given that taxes are distortiona l to the economy, i.e. it 
is costly in efficiency terms to co llect them (see Kleven and Kreiner, 2006, 
Sandmo, 1998), a reduction in the USO bur den has the potential to lower the 
marginal costs of public funds required to compensate the postal operator for 
unprofitable services. The reduction in cost from introducing service level 
alternative i, ∆%	
�, introduced in equation (1) can now be broken down in the 
following way; 
:5; ∆C	
g
L∆c	g I
E∆c	gE
E∆c	gT 
where c	
I denotes the labor and capital costs, c	E is the value of the 
environmental externalities, and c	
T defines the total value of the tax distortions. 
All components can be assumed to increase with the service level s (and quantity 
q) though relationships may not be smoot h due to the well-known logistical 
complexities of mail sorting, distribution and delivery. 
 
3 Measuring welfare effects of reducing the USO: Methods and 
assumptions 
3.1 The Norwegian postal market and proposed changes in the USO 
 
The USO in Norway 
In Norway, the USO license is granted NP by government and determined by the 
EU Postal Directive, which Norway is obliged to comply with through its 
European Economic Area (EEA) agreement. In addition, NP has a license issued 
by the Norwegian Ministry of Transport and Communications, which requires NP 
to preserve a level of USO that exceeds the requirements of the Directive in a 
number of respects. According to NP’s license, the main elements of the USO are 
as follows: (i) each municipality must have at least one post office or contract post 
office offering basic postal and financial services; (ii) postal services must meet 
specified quality of service standards; (iii) delivery is require d to all addressees 
six days per week; (iv) rates for universal postal services must be cost oriented, 
transparent and non-discriminatory; and (v) rates for reserved services must be 
geographically uniform thr oughout the country. One of th e most important quality 
requirements (linked to ii) is that at least 85 percent of domestic priority letter 
mail should arrive within one day after deli very (“D+1”), while at least 97 percent 7Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
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shall be delivered within D+3. For non-pr iority mail, the requirements are D+4 
and D+6, respectively. NP is granted the exclusive right by the Postal Act to provide closed, 
addressed domestic letters within a certain weight (< 50 grams) and price limits. 
NP’s license also states that the burden of the USO shall be offset by the surplus 
from the reserved area and, if the surplus fr om the reserved area is insufficient, by 
compensation from the state. Norway has a total area of 385,252 square km 
(148,747 sq mi) and a population of a bout 5 million. The rugged and long 
coastline broken by long and deep fjords a nd thousands of islands combined with 
the widely accepted policy goal of mainta ining settlements in rural and remote 
areas makes Norway the second least densely populated country in Europe 
(behind Russia). Due to this settlement pattern and long travel distances the 
surplus of the reserved ar ea traditionally has been insufficient. In 2010, the 
government compensated NP approximately 500 million NOK (USD 83.3 
million	
9). 
 
Three alternative service levels compared to the current USO 
Three alternatives to the current USO were chosen that were thought to represent 
relevant and realistic alternatives fo r NP, the NPTA and NP's business and 
residential customers. Changes were sugge sted for priority letters and postcards 
only, the largest bulk of normal post. Furthe r, the alternative service levels make 
changes in the delivery speed and/or de livery frequency. The three alternative 
service levels, and the current USO (Altern ative 0, the reference level), are listed 
in Table 1. 
Table 1 Overview of the delivery speed and frequency of letters and postcards 
for the current USO and three alternative service levels 	
 Delivery speed Delivery frequency 
Today´s USO 
(Alternative 0) At least 85 percent of prioritized domestic mail 
arrive the next day (D+1) Six days a week – 
Monday to Saturday 
Alternative 1: 
 At least 85 percent of prioritized domestic mail 
arrive within three days (D+3) 
Six days a week (as 
today) 
Alternative 2: 
 At least 85 percent of prioritized domestic mail 
arrive the next day (as today) 
Five days a week – 
without Saturdays 
Alternative 3: 
 At least 95 percent of prioritized domestic mail 
arrive within three days within southern and 
northern Norway, respectively, within 5 days 
between the regions Three fixed days a 
week 
Source: Pöyry and Vista Analysis (2011)
 in cooperation with NP and NPTA. 
 	 	9 Average exchange rate for 2010 was 6.0453 NOK/USD. 8Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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Alternative is 1 motivated by the hypothesis that for th e lion’s share of 
normal post it is not very important that it arrives overnight. Since only 85 percent 
can be ensured within this time, it is like ly that important letters are sent using 
guaranteed services if timing is essentia l. Hence, a suggested three days is 
suggested instead, l eaving the 85 percent requirement and the delivery frequency 
the same. Alternative 2, which removes Sa turday as a delivery day, is a publicly 
much debated option in Norway. It is co ntroversial since some remote areas get 
newspapers and magazines delivered by NP, and there may not always be 
alternative providers at reasonable cost. Ho wever, abstracting from this issue, we 
hypothesized that most people would not mind not getting post on Saturdays. Finally, Alternative 3, changes both delivery time and frequency. This 
option was designed by NP to save substa ntial costs, as delivery requirements 
long distance between regions, the major driver of its costs, are loosened 
compared to Alternative 2. In addition, the delivery security can be upped \
to 95 
percent without substantial increase in co sts. A delivery frequency of three fixed 
days is also suggested ba sed on the hypothesis that it ma y be more important for 
consumers to know which days of the week they will receive letters for sure, than 
post spread over the whole week. 
3.2 Contingent valuation survey and benefit estimation approach 
 
Survey design 
 
To measure the WTP of households and SMEs to remain at the current service 
level compared to the three USO alternat ives, a fairly standard CV survey was 
designed following recent best-practice guide lines in the field (e.g. Bateman et al., 
2002, SEPA, 2006). We explain the most comp rehensive household version of the 
survey first. This survey first included questions about how often respo\
ndents 
receive and send various types of post be fore explaining, in a non-technical way, 
the current USO requirements. The survey then continued through a series of 
Likert scale and open ques tions about the importance to the household of the 
various USO requirements and potential changes to those. These questions served 
to make respondents think about the US O and their own use and prepared the 
ground for the WTP questions. The second part of the questionnaire first contained information about the 
rational for considering reduction in the service levels (gradual switch to 
electronic communication, in creasing costs). This is important to make 
respondents believe in the potential polic y changes, to justify why it may be 
important for society to cons ider and for them to expend the effort necessary to 
make the trade-off for their household. It then presented the three alternative 9Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
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levels in a simple table (similar in appearance to Table 1 above, though 
simplified). The respondents were first asked to rank the alternatives in 
accordance with which service level best match the needs of their household. As 
this choice is cheap in th e sense that it does not carry any costs to the respondent’s 
household, it was no surprise that the larg e majority of the respondents ranked the 
current USO as the best. This was followed by alternatives 2, 1 and finally 3. This 
indicates at least that mo st respondents understood th e relative scope of the 
service changes they faced. 
After this warm-up a short text e xplained the cost implications of 
maintaining the current service level and that the respondents now should 
consider how much Alternative (status quo) was worth for their household 
compared to the alternatives. The res pondents were notified that changes would 
only affect normal priority letters and postcards (not newspaper or magazine 
delivery, or parcels and non-priority ma il, which would remain unchanged) and 
that they should consider the changes both as private	
10 senders and recipients of 
post. In addition, it was specified that the USO is meant to satisfy the most 
important postal needs of the population, and that many other services would still 
be provided on a commercial basis in most parts of the country.	
11 It was also 
specified that a potential continuation of the current level of the USO would be 
funded by an extra, annual tax per house hold earmarked to funding NP costs from 
the USO provision (in addition to normal postage). 
Respondents were first confronted with Alternative 1 compared to 
Alternative in a table, and asked th eir household’s maximum WTP to maintain 
status quo (see Appendix 6.1 for a graphic illustration from the web survey for 
this question). A standard household budget reminder, asking for a realistic annual 
amount, was added before respondents c ould indicate their “highest amount, if 
anything, your household would pay” in a payment card in the form of two 
vertical columns of radio buttons w ith a non-linear scale containing 24 amounts 
(ranging from first to NOK 15,000	
12), including “don’t know” (at the end). The 
amounts were chosen on the basis of previous CV studies and payment card 
chosen as response format over dichotomous choice (“Yes” or “No” to a specific 
amount), to avoid so-called yea saying and to preserve data efficiency (Boyle, 
2003). No time limit was indicated for the tax payment, indicating that the tax 
hike would be permanent (as tax hikes most often are). 
 	
 	10 They were asked not to consider the mail se nt and received in connection with their work. 11 As it would vary what sort of services would be viable in different parts of the country, we could 
not go into detail on this question but only emphasise that all services would not disappear. This is 
the question of available substitutes (variable SUB in equation (3)) in case the current postal 
service level is reduced. It is not a completely satisfactory approach, but the simplest given the 
difficulty of predicting and explaining which services would be viable in different areas. 
12 There was also an option to ch oose “more than 15000”, in which case the exact amount could be 
specified in a separate space. 10Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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Following the first WTP question, the respondent got 
two identical 
questions in turn, with the only differen ce that Alternative 1 now was replaced 
with Alternative 2 and Alternative 3, resp ectively (displayed in the same table 
containing only the two alternatives fo r comparison at a time). The respondents 
were informed before the WTP questions th at they would be asked about all three 
alternatives, a type of advance disclosu re to help respondents think, improve 
consistency and avoid “surprise” eff ects (see e.g. Bateman et al., 2004).	
13 The rest 
of the CV survey followed standard pro cedure, probing into why people answered 
zero or positive. Particular emphasis was made to identify responses that could 
indicate protesting against the proposed reductions in service levels rather than a 
“true” zero WTP, as this was expected to be a potential issue. The final part 
collected socio-economic background in formation, which was merged with 
existing Internet panel information about the respondents and their households. 
The survey instrument went through pilot testing before administering to the full 
sample, through which no major problems with the survey were identified.
14 
 
Sampling and administration 
 
The questionnaire was adopted to be administered to households in an Internet 
context, following advice e.g. give n by Dillman (2008). Although personal 
interviews have been recommended for CV in the past (Arrow et al., 1993; 
Mitchell and Carson, 1989), this mode also has drawbacks of very high cost and 
potential social desirability bias. Recently Internet CV surveys have been shown 
to give reasonable response quality and potentially lower social desirability bias 
leading to more conservative WTP estim ates (Lindhjem and Navrud, 2011a, b). A 
randomly recruited panel of ca. 50,000 willing respondents, maintained by the 
professional survey firm TNS Ga llup was used for the survey.	
15 Norway has one 
of the highest Internet br oadband penetration rates in the world, and around 95 per 
cent of the population is we ll covered at reasonable speeds (at least 4 Mbit/s). The 
survey was conducted on a representative sample of the Norwegian adult (>15 
years of age) population in June-July 2010. To be sure to cover the older part of 
the population who normally are less com puter literate, an additional small 
sample recruited from the same panel of respondents was administered through a 
normal mail survey. The net sample was 2,013 completed responses. 
 	
 	13 For simplicity, the order of the alternatives were not randomized between respondents, though 
this could have been a strategy to reduce potential order effects. However, the advance disclosure 
procedure is an alternative procedure to alleviate this problem. 
14 The full survey questionnaire is available in English from the author upon request. 15 TNS Gallup uses no form of self recruitment (s uch as website advertisements etc), which is a 
common form of Internet survey recruitment, including in panels such as Ha rris Interactive in the 
US (see e.g. Baker et al., 2010). 11Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
?
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Small and medium sized enterprises 
 
A simplified version of the household questionnaire was adopted for computer-
assisted telephone interviewing and admini stered to a sample of SMEs by the 
same polling company. It was not considered possible to conduct this kind of 
survey through e-mail due to potential pr oblems of response rate and getting hold 
of the right person within the firm, a nd there was no web panel available for 
SMEs. The sample frame was a national register maintained by the polling 
company of 390,000 SMEs with less than 50 employees, covering all main sector 
and geographical areas, i.e. representati ve of the Norwegian population of SMEs. 
The survey was targeted to a person responsible for accounts and/or postal 
services and the WTP questions were framed in terms of “how much, if anything, 
would your company pay per year to main tain the current level of services 
compared to…”. Based on a pilot of 30 SMEs, the questionnaire was simplified, 
i.e. information shortened compared to the web survey. The net sample was 375 
SMEs. 
 
Econometric estimation of mean WTP 
 
Answers to the WTP questions using paym ent card return interval data. If 
respondents indicate that their maximu m WTP is NOK 1,100 per year, their true 
WTP will lie somewhere between this amount and the next one up, NOK 1,400. 
23 amounts were used on the payment card giving fairly narrow intervals. For 
simplicity, respondents’ true WTP was appr oximated using interval mid-points as 
proxies and simple mean of the dist ribution estimated, following procedures 
described in e.g. Cameron and Huppert ( 1989). For the purpose of our analysis, 
this estimation procedure is accurate enough and follows the true WTP 
distribution fairly closely (see e.g. Table III in Cameron and Huppert ibid). 
 
3.3 Methods to estimate cost savings 
We discuss the methods to estimate the three social cost components in turn 
below. 
 
Estimation of input cost savings 
 
Out of a total cost of NOK 8.7 billion in 2010 (Pöyry and Vista Anal\
ysis 2010), 
sorting and distribution of post to cu stomers accounts for more than half. A 
reduction in the USO service level implies that there is less need to sort, transport 12Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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and/or deliver mail around the country. Bu t the relationship between costs and 
delivery frequency and speed is far fr om smooth. As anyone involved in the 
production of postal services would know, the logistics are highly complex and 
cost implications best assessed by the NP itself. NP and Norwegian Ministry of 
Transportation and Communication have ove r time developed a USO Cost Model 
called the ACS-model (see Bergum, 2008).	
16 The main objective of the ACS-
model is to estimate the USO burden depe nding on certain services levels and 
service standards. The model is the basi s for any annual government transfers to 
cover the USO burden, and is independen tly verified. The model is based on a 
plausible definition of NP’s strategy without the USO (and reserved, monopoly 
area) consistent with main elements of NP’s current commercial strategies. The 
reference scenario (in absence of the USO) is characterized by local reductions in 
the service quality, similar to the service reductions considered in our analysis. 
The ACS-model, together with current co sts of the relevant parts of the postal 
network, is therefore a good framework to calculate the cost reduction for each of 
the three alternative service levels. As pointed out by Dieke and Niederpruem (2008) the ACS-model is based 
on the assumption that cutbacks in service have a negligible effect on sales. This 
assumption is a convenient simplification, but due to the specific type of cost 
structure of NP, any demand reductions may not have large impacts on total costs. 
The postal network in general is characte rized by economies of scale, requiring 
large fixed costs to maintain the networ k and justifying only one supplier in rural 
areas where volumes are (already) small a nd distances long. The main driver of 
costs can be argued to be the USO servic e specifications. For this project, the 
potential labor and capital cost savi ngs were calculated by the research 
department of NP using the AC S model, overseen by the NPTA.	
17 The lion’s 
share of the cost savings are due to freed-up labor resources. Due to almost no 
unemployment in the Norwegian economy, even during international financial 
crises, it is reasonable to assume that labor resources can relatively easily be 
reallocated to other uses. The Norwegia n Ministry of Finance (2005) recommends 
ignoring search and friction costs of people seeking new employment in CBA. 
Hence, it represents a cost saving to soci ety counted in full to reduce labor input 
for NP. 
 
 	
 	16 ”Alternative Commercial Strategy”-model. 17 The detailed structure of the cost model is conf idential for commercial reasons. For our purpose, 
it suffices to present the main assumptions and ge neral structure of the model and the main cost 
changes for each of the alternative USO levels. Since the cost modelling task was part of an 
official government project and could in principle be checked by the Norwegian Post and 
Telecommunications Authority and its auditors, we believe it unlikely that NP deliberately 
exaggerated its cost estimations for strategic reasons. 13Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
?
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Estimation of environmental externalities avoided 
 
All three service alternatives will reduce transport needs, both air and road 
transport, which in turn will reduce emissions of greenhouse gases (mostly CO	
2) 
and other harmful substances and reduce ot her transport related externalities, such 
as noise, accidents and traffic jams. Reductions from road transport are for CO
2 
calculated based on fuel use and emissions per liter fuel, from the NP’s ACS 
model. Emissions, sulphur dioxide, nitrogen oxides (NOx), non-methane volatile 
organic compounds (NM/VOC) and particle s, are calculated based on average 
emissions per km multiplied by given distances, using standard emission factors 
for Norwegian transport modes (Statistics Norway, 2008). The next step is to assess whether and to what extent existing taxes and 
levies in the transport sector are set at levels which can be considered already to 
internalize the externalities. If so, it w ould be double counting to include these. 
This assessment depends both on the type of tax (i.e. if it can be considered 
externality-motivated) and the level of th e tax compared to the assumed marginal 
WTP for emission reductions. The CO	
2 tax per liter fuel for air transport of NOK 
0.68/liter (or around NOK 267/tonne CO
2) tax is higher than the general domestic 
CO	
2 tax for mineral oil (ca. NOK 218 per tonne ). The tax is also somewhat higher 
than the long-term expected carbon price in the European emission trading 
scheme, at the time, at around NOK 240 (Euro 30) (Point Carbon, 2010). For our 
conservative estimate, we assume that the CO	
2 effect for air transport is 
internalized through taxes paid by NP. In addition to the global CO	
2 externality, air and road transport cause other 
emissions and noise. Given the dispersed population pattern in Norway, not many 
people are generally affected. Based on am ong others the costs of reaching the 
targets for NOx emissions of the Goth enburg Protocol and previous studies 
valuing noise reductions, ECON (2003) esti mates the total external costs of air 
transport at NOK 1.85/tonne-k m. Subtracting the CO	
2 assumed to be internalized, 
we arrive at a cost estimat e of NOK 1.75/tonne-km. For CO	
2 from road transport, 
the taxes are considered by ECON (2003) to be slightly too low for heavy duty 
vehicles (that use diesel) and slightly too high for automobiles. Including CO	
2 and 
other externalities from road transport EC ON (2003) calculates that the taxes paid 
by NP for diesel and petrol currentl y only internalize around half of the 
externalities from road transport caused by the current USO level. For our main 
alternative, we use these assumptions. Since Norway has an ambitious clim ate policy, it may be argued that a 
higher carbon price than NOK 240/tonne s hould be used. Norwegian Climate and 
Pollution Authority (2010) ha s calculated that to reach climate neutrality in 2030 
and cut 2/3 of emissions domestical ly, the average cost per tonne CO	
2 would be 
NOK 1,500. For sensitivity, we also estimat e externality cost savings for this 14Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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alternative. Assuming consta nt postal volumes for the three service alternatives 
potential externalities related to paper us e and disposal, an environmental impact 
considered by Boldron et al. (2011), can therefore be ignored in the analysis. 
 
Estimation of reduced tax distortions 
 
Raising funds for public projects and po licies through taxation is costly in 
efficiency terms, since taxes create wedges between the prices for supply and 
demand. The guideline by Norwegian Mini stry of Finance (2005) recommends 
assuming that 1 NOK for a public project or policy in tax costs 0.2 NOK to raise. 
The USO in Norway has traditionally been partly financed by taxes and partly by 
profits from the reserved area. The prof its from the reserved monopoly area have, 
however, been falling in recent years and is for 2010 estimated at zero. For 
simplicity we therefore assume that 1 NOK saved by NP represents 1 NOK 
reduction in the need for government tran sfers. This means in practice adding 20 
percent to the labor and cap ital cost savings. The exception, only relevant for 
alternative 3, is where the cost savings are so large that they outweigh the 
government transfer for 2010 of NOK 497 million. In this case, this figure is used 
as a ceiling to calculate the reduced tax distortions. 
4 Results 
 
4.1 Reduction in consumer benefits 
 
Household willingness to pay 
 
Starting with the survey of households, 1,762 of the 2,011 web respondents who 
received the survey completed the questionnaire in full. This yielded a final stage 
response rate of 88 per cent, which is high for this type of survey.	
18 The postal 
version sent to older respondents yiel ded 251 completed questionnaires out of 
467, a response rate of 53 per cent. Except for some slight underrepresentation in 
the age group below 39 years of age, the net combined postal and web sample was 
largely representative of the Norwegian a dult population in terms of age, gender 
and geography. In all CV surveys a larg e share of respondents typi cally indicate zero WTP 
for proposed increases in th e supply of a public or quasi-public good or to avoid a 
reduction. In our case the share was somewhat higher than normally observed at 
 	
 	18 This rate does not include the unknown respon se rate related to the polling company’s random 
recruitment to the websurvey panel. 15Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
?
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around 51 per cent. Of these respondents ar ound 41 per cent stated as one of two 
reasons that “I think I have a right to the current level of postal services”. This 
may be considered a protest reaction to the scenarios they were confronted with	
19, 
rather than a zero utility effect for these households. Following the most common 
procedure in our base case, these respondents and other zero respondents 
indicating reasons not reflec ting real wealth-utility trade-offs, were removed from 
the sample (Bateman et al., 2002). Around 10-11 per cent of the respondents 
indicated “don’t know” in the payment card, and were also removed. Further, the 
data were inspected for very high re sponses, typically above 2-3 per cent of 
annual income (and blank income res ponses removed). No such unreasonably 
high responses relative to income were identified. Mean WTP per household per 
year was then estimated for each serv ice alternative in turn, following the 
procedure described in section 3.2 above. Re sults are displayed in column two of 
Table 2 (and net sample si ze in column three). 
Table 2 Mean annual household WTP and total WTP for the Norwegian 
population (with confidence intervals – CI) to maintain the current 
level of the USO compared to given alternative, NOK 2010 
Alternative Mean WTP (95% CI) n Total loss (NOK million)* 
(95% CI) 	
1 383 (294, 471) 1261 831 million 
(638, 1022) 
2 345 (246, 443) 1264 749 million 
(534, 962) 
3 454 (357, 550) 1254 986 million 
(775, 1 194) 	
Notes: * In 2010 the number of households was 2 170 893 in Norway according to SSB (2010), which 
multiplied with mean household WTP yields the figures here. 	
 
Mean WTP to remain at the curre nt USO level was found to be NOK 383, 
NOK 345 and NOK 454, for the three alte rnatives. These differences are 
statistically different using paired t-test s, indicating that respondents consider it 
(slightly) better to lose Saturday (alt. 2) as delivery day than to reduce delivery 
speed from one to three days (alt.1).	
20 However, alternative 3 is considered 
 	
 	19 As mentioned in section 2.2, the share of protesters tend to be higher if the scenario descriptions 
are cast in terms of willingness to accept compensation for foregoing the current service level. 
20 T-values for pairwise t-tests where 4.52 for hyopthesis WTP3=WTP2, 2.8 for WTP3=WTP1, 
and 3.01 for WTP1=WTP2. N was 1220 for all three tests, as a few more observations were 
removed in pairing the data. 16Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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considerably worse than the first two. The stated WTP amounts mimic the results 
of the ranking exercise conducted before the WTP questions, as mentioned in 
section 3.2. A priori, it was fairly cl ear that respondents would consider 
alternative 3 the worst opti on, though this alternative is not entirely negative. 
Hence, the mean WTP shows that there is some internal consistency in how 
respondents consider the alte rnatives. The most common reason people stated for 
their positive WTP was that they “think it is important to have a postal network of 
the same quality as we have today”. Th e second most frequent reasons included 
the importance of having the option to use the network, that it is important to 
maintain the network even if the respondent did not pe rsonally use it much, and 
the potential problems rural areas may e xperience if service levels are reduced. 
Such responses indicate a considerable positive utility of maintaining the postal 
network for altruistic and option-value reasons. The total number of households in Norway in 2010 was 2,170,893 
according to Statistics Norway (2010), which multiplied with the mean WTP 
amounts yield estimates of the consumer welfare loss for each service alternative 
(column four in Table 2). The confiden ce intervals are carried over in the 
estimates of the total welfare loss. For sensitivity, we also calculate mean WTP if 
none of the zero respondents are remove d, i.e. yielding a conservative welfare 
estimate. In the base case the removed re spondents are implicitly assumed to have 
a WTP equal to the mean of the remaini ng sample when scaling up to the whole 
population. Including them in the sample instead, yields mean WTP of NOK 279 
(CI: 214, 343) for Alternative 1 (n=1,779), NOK 249 (CI: 179, 320) for 
Alternative 2 (n=1,790), and NOK 326 (CI: 256, 395) for Alternative 3 
(n=1,782).	
21 These conservative WTP estimates in turn yield population estimates 
of NOK 605 million for alternative 1, NOK 541 million for alternative 2 and 
NOK 708 million for alternative 3. The mean WTP per household estimated here may be considered fairly 
low, but within the range of what hous eholds spend on other goods during a year. 
At least, they may not be considered unr ealistically high for a public service as the 
postal network. In addition to the cons istency checks of responses mentioned 
above, it is also common in the CV literat ure to investigate construct validity, i.e. 
whether WTP vary in expected ways with a number of common variables. This is 
because true WTP cannot be observed fr om hypothetical market responses, and 
therefore validity must be investigated in other ways. For sake of brevity, a full 
analysis of this sort is not included here . However, a simple regression analysis of 
(the log of) WTP for the three alternat ives is included in Appendix 6.2. This 
 	
 	21 Following the procedure of Cameron and Huppert (1989) zeros are assigned the mid point in the 
0-25 category of the payment card, i.e. 12.5. Interpreting instead the responses as zeros would 
have a minor impact on the mean WTP, e.g. NOK 271 instead of NOK 279 for alternative 1 whene 
all zero responses are included and NOK 377 in stead of NOK 383 for the base estimate. 17Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
?
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analysis shows, for example, that those who stated that the current level of the 
service is “more than needed for thei r household”, reflect this opinion through 
also stating lower WTP. Those who in the ea rly parts of the survey say it is very 
important for their household that most ma il arrives within one day and to keep 
Saturday, state significantly higher WTP to keep the current service level, also as 
expected. Interestingly, and perhaps in tune with the responses mentioned above 
about the importance of the network rather independently of own use, there seem 
to be a relatively weak relationship be tween stated frequency of sending and 
receiving letters and cards, and WTP (t hough two of three models indicate that 
people who frequently receive tend to have somewhat higher WTP). Interestingly, 
there seem to be no relationship betw een WTP and whether respondents live in 
rural areas or their frequency of Internet use (proxy for electronic communication 
as an alternative to normal post). Ov erall, the regression results are not 
implausible, giving some trust in the responses. 
Small and medium sized enterprises 
A fairly high share of the sampled telephone numbers from the database of SMEs 
was inactive. From the 954 SMEs where contact by phone was established, 375 
full interviews were conducted, i.e. a fina l stage response rate of 39 percent. A 
similar procedure for judging protest response as for the households was 
conducted. Overall, a higher share of SM Es answered between and 25 NOK, 
than for the households. In addition, a few businesses that had a fairly large WTP 
and reported annual sales of zero the year before, were excluded. This l\
eft from 
166-189 responses for the three WTP questi ons (see Table 3). The mean WTP for 
the three alternatives were NOK 410, 281 and 264, respectively. 
Table 3 Mean annual SME WTP and total WTP (with confidence intervals – 
CI) to maintain the current level of the USO compared to given 
alternative, NOK 2010. 
Alternative Mean WTP (95% CI) n Total loss (NOK million) 
(95% CI)* 	
1 410 (169, 651) 166 156 million 
(64, 247) 
2 281 (70, 491) 189 107 million 
(27, 187) 
3 264 
(108, 420) 167 100 
million 
(41, 160) 	
* According to TNS Gallup there were around 47 5,000 SMEs with 50 or fewer employees. 18Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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Naturally, the confidence intervals ar
e broader than for household WTP. It 
is not surprising that SMEs consider it more valuable to avoid alternative 1, with 
slower sending times, than to lose Saturd ay as delivery day in alternative 2. Most 
SMEs do not collect or send mail during weekends (though some of them may 
consider it important that consumers rece ive post sent on Fridays). SMEs consider 
alternative 3 simila r to alternative 2, which is perhaps somewhat puzzling. We 
cannot rule out that the last alternat ive may have been too complicated to 
communicate on the phone. The WTP estimates for SMEs should be considered more uncertain than 
household WTP, and we have not conducte d validity analysis of the types 
conducted for households. The total number of SMEs in Norway is around 
475,000 according to Statistics Norway ( 2010). Out of these we estimate that 
around 20 percent are “sleeping”, based on the number of businesses with “dead” 
phone numbers, leaving a total population of around 380,000 SMEs. 
Conservatively, we estimate the loss to these businesses of between NOK 100-
156 million, depending on the alternative considered (column 4, Table 3). 
4.2 Social cost savings 
 
Input cost savings 
 
Applying the ASC model described in section 3.3, removing the requirement that 
prioritized mail must arrive overnight (alternative 1) would save NP, and society, 
around NOK 238 million annually. This reducti on is primarily related to lower 
use of air transport (between north and s outh of Norway especially), less need for 
relatively expensive night time labor and rationalization of the terminal structure 
for incoming and outgoing post. Removing the Saturday delivery requirement in 
alternative 2 would reduce costs by NOK 468 million annually. The primary 
component here is reduction in distribut ion costs, around 378 of which are labor 
costs. There would also be some reducti ons in air freight and general transport 
costs, though lower than for alternative 1. Finally, in alternative 3, substantial 
costs can be saved as NP can optimize tr ansport and sorting between the southern 
and northern regions of Norway. Both delivery days and speed are cut. The total 
cost savings were estimated at NOK 1.128 billion annually. Current distribution 
costs can be more than halved if this alternative is chosen. 
 
Environmental externalities avoided 
 
Table 4 shows the percentage reductions in different types of emissions from 
transport for the three alternatives compared to the current USO. In relative terms 
compared to the current USO level the redu ctions are fairly substantial. However, 19Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
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relative to the total Norwegian emissions, the reductions are marginal. The 
emissions of CO	
2 from transport to fulfill the current USO level, for example, 
amount to 0.1 percent of total Norwegian emissions. This would be reduced to 
0.02 percent in alternative 3. 
Table 4 Selected transport-related emission reductions for the three 
alternatives compared to the current USO, CO	
2 in tonnes, other 
emissions in kilograms 
Alternative CO	
2 SO	2 NO	x NMVOC Particles 	
Tonne Kg Kg Kg Kg 	
1 14,785 1,408 52,426 3,567 66 
2 7,428 450 21,231 3,009 1,575 
3 30,400 2,124 92,469 10,984 4,761 	
 	
Pricing these emission reductions appl ying the assumptions discussed in 
section 3.3 yields changes in the non-internalized environmental costs as given in 
Table 5. 
Table 5 Reductions in (non-internalized ) environmental costs from transport. 
Million NOK 2010. 
Alternative Environmental costs – base case* Environmental costs 
– ambitious climate policy** 
1 11.5 million 34.6 million 
2 9.9 million 20.9 million 
3 35.8 million 81.7 million 	
* CO	2 price of NOK 240, **Abatement cost per tonne CO	2 of NOK 1500. 	
 
For alternative 1 in the base case th e whole change (11.5) is related to 
reduced air transport, as the road transport is assumed constant between the two 
alternatives in the ASC model. Alterna tive 2 consists of NOK 3.2 million from air 
transport and 6.7 million from road transport. For alternative 3 the total change in 
environmental costs are divided into NOK 15.8 million from air transport and 20 
million from road transport. In the case where we assume a more ambitious 
climate policy, the change in environmen tal costs range from NOK 20.9 to 81.7 
million, depending on the alternatives. 
 
 20Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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Reduced tax distortions 
 
The reduced tax distortions constitute 20 pe r cent of NPs cost savings going from 
the current level of the USO and the alternatives. The only exception is in 
alternative 3, where the cost savings of NP is so large that the government support 
(for 2010 estimated at NOK 497 million) w ould we reduced to zero. Hence, the 
saved tax distortion is calculated from NOK 497 million. The savings are 
therefore NOK 48 million, 94 million and 99 million, for the three alternatives, 
respectively. The overall social cost savings are given in Figure 1, split into 
transportation, labor and terminal st ructure and administration costs, non-
internalized environmental cost s, and costs of public funding. 
Figure 1 Social cost changes for the three alternatives, NOK million 2010. 
 
4.3 Cost-benefit comparison and sensitivity considerations 
 
Costs and benefits in the base case 
 
The changes in costs and benefits are summarized in Table 6. Reducing delivery 
speed to D+3 in alternative 1 would give an estimated overall welfare loss of 
NOK 749 million. Keeping the delivery spee d constant and instead removing 
Saturday as delivery day, would give a lower welfare loss of NOK 283 million. 
As consumers seem to consider delivery speed only slightly more troubling than 
losing Saturday as a delivery day, the hi gher cost savings in alternative 2 eats up 	
0 200 400 600 800 1 000 1 200 1 400
A lt 1 A lt 2
A lt 3	
Labour cost
Transportation cos t
Terminal structure and administration cost
Non-internalized environmental cost
Cost of public funding 21Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
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almost all the utility loss. Finally, the only alternative that would give a net 
welfare gain in our anal ysis is reducing both deliv ery speed and number of 
delivery days in alternative 3, as this enta ils substantial cost savings that are not 
outweighed by the loss of consumer benefits. 
Table 6 Cost and benefit component s, annual changes in NOK million 2010. 
Alternative Alt. 1: D+3 
delivery Alt. 2: 
Remove 
Saturday Alt. 3: 
(note*) 	
Social cost savings: 
 
Cost savings for Norway Post 238 468 1,128 
Environmental externalities 12 10 36 
Tax distortions 48 94 99 
Total quantified cost savings 298 573 1,263 
Consumer loss: 
Households 831 749 986 
Small and medium sized enterprises 156 107 100 
Total quantified utility loss 987 856 1,086 
 
Net benefits -749 -283 177 
Net benefits (excluding SMEs) -533 -176 277 
*Alternative 3: 3 regular days delivery frequency and 3 days delivery speed within Southern and 
Northern Norway and 5 days between the regions. 
 
Sensitivity of results 
The cost and benefit estimates are uncertain, and we consider the SME estimates 
more so than the household estimates (as is only partly reflected in the wider 
confidence intervals for the SME estimates in Table 3). Removing the SME 
estimates altogether, do not change the overa ll ranking of alternatives or the sign 
of the net welfare change (last line of Table 6), but makes alternative 3 more 
beneficial. Treating the household estimates even more conservatively by not 
removing any zero responses in the final sample, as discussed in section 4.1, 
would reduce consumer lo ss in alternative 2 by NOK 208 million, bringing this 
alternative almost to break even, while the net-benefits of the other two 
alternatives remain firmly below a nd above zero, respectively. Finally, 
considering a more ambitious climate pol icy as discussed in section 4.2 would 
pull results in the other direction, but only by around NOK 11 million for 22Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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alternative 2. In any case, lower environmental impacts are dwarfed by other costs 
and benefits in the overall comparison. Note that the potential loss of benefits to 
large mailers (large companies) have not been included. Including this would 
make alternatives 1 and 2 more negativ e, while alternative would be left 
undetermined. 
5 Discussion and conclusions 
This paper has conducted a cost-benefit analysis of three alternative po\
licy 
proposals for reductions in the current USO in the Norwegian postal sector, with 
particular emphasis on the loss to consumers and small and medium sized 
enterprises. Despite our (and the Norweg ian regulator’s) original hypothesis that 
reduction in delivery speed and frequency may not matter that much to household 
consumers, their stated preferences for the current USO level tells a slightly 
different story. Consumers are willing to pay to keep up the current service 
standards, and seem to care more about speedy delivery (D+1 rather than D+3) 
than losing Saturday as one of six delivery days. Analysis of the total cost savings 
shows that neither of these two alternativ e service levels gives net welfare gains. 
Only in the third alternative, where both delivery times and frequency are 
reduced, the cost savings are so large that they outweigh loss of consumer 
benefits. Based on our analys is, this is the preferred option on social efficiency 
grounds. Note that we have not been able to include potential loss to large 
mailers, which would leave alternativ es 1 and 2 even less desirable. 
The only other studies we are aware of that has attempted to estimate 
benefits to households and SMEs of a full postal network and/or individual 
services of the network are NERA (2009) and Rand Eur ope (2011). Using a 
similar stated preference survey to our s and disaggregating a total household WTP 
estimate for the entire postal network into services of general economic interest 
from the post office network	
22, NERA (2009) find that mean WTP for households 
for only the postal services ranges from UK£ 1.3 – 6.3 per month, or 
approximately NOK 140 – 680 per house hold annually. Our estimates are 
comparable to this range. NERA (2009) also confirms our finding that consumers 
(both households and SMEs) seem to value the existing postal network highly and 
that many of the derived benef its are unlikely to be reflected in their direct use of 
the network. Rand Europe (2011) is not directly comparable to our study, as they 
use a choice modelling (CM) approach th at price service individual attributes 
relative to the stamp prices in the resp ective countries surveyed (Sweden, Poland 
 
 	22 This disaggregation is not without problems and typically suffer from issues of part-whole bias, 
related to the scope insensitivity problem discus sed below. Our approach did not, like NERA 
(2009), attempt to value the whole postal networ k, but rather some specific changes directly. 23Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
?
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and Italy). Both these studies and ours s how that stated preference surveys are a 
potential route to get to the unpric ed benefits of postal networks. 
Even if promising, contingent valuati on surveys also have their challenges 
worth noting here (see e.g. Carson et al., 2001) for a general overview). We will 
mention the three, in our opinion, most im portant ones, one of which is a specific 
problem in situations where service provi sion is reduced. The first challenge is 
that of scope insensitivity, i.e. that pe ople’s WTP is found not to vary sufficiently 
with the scope or quality of a good. It is not clear from theory how WTP should 
vary with scope in given situations, but WTP should be higher to avoid large than 
small service reductions. Further, a small reduction from a relatively high service 
level should also be worth less than a re duction from an already low level. In our 
case, reductions may be considered to be from an already high service level. We 
do find internal scope sensi tivity in our survey, i.e. that respondents state 
significantly higher WTP to a void alternative 3, clearly the worst option. Even if 
the amounts respondents state are plausible, we are not entirely convinced that all 
respondents understood the implications of the more complex alternative 3. A 
topic for further research would be to try to display service changes in alternative 
ways, randomize order of alternatives and ad minister different service alternatives 
to subsamples to conduct clean tests of scope sensitivity between respondents (so-
called external scope tests). This would be particularly important as alternative 3 
is the only option that imply positive welfare change if implemented. This is also 
the potentially most politically controversia l alternative, as politicians are unlikely 
to accept the use of equal welfare weight s between consumers in urban areas vs. 
rural areas (which in effect are cross-subsidized by the former). 
The second challenge is that of hypothet ical bias, i.e. that respondents state 
higher WTP than they would actually pay if faced with a real trade-off in the 
marketplace. This is generally a valid cr iticism. Some studies find hypothetical to 
actual WTP ratios of around 1.35 (Murphy et al., 2005) while others find higher\
 
ratios of around 3 (List and Gallet, 2001). Even so, we are not overly concerned 
that the WTP estimates are highly inflated in our case. First, a large share of 
respondents stated zero and mean WTP is relatively low compared to other 
household expenditures. Second, Internet surveys often give lower WTP estimates 
than other survey modes involving an inte rviewer, possibly due to reduction in 
social desirability bias (Lindhjem and Navrud, 2011b). Third, we included all zero 
respondents for sensitivity, which did not tip the balance. Finally, Norwegians are 
generally honest survey respondents, a nd hypothetical bias has been shown to 
vary between cultures (Ehmke et al., 2008). If CV is expected to be problematic in 
this sense, an alternative approach r ecommended by some is to use CM method 
where people’s WTP is derived indir ectly. However, it is well-known by 
practitioners that these surveys when compared tend to give higher mean WTP 
estimates than standard CV (for unknown reasons). 24Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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The final CV challenge, of specific importance to researchers assessing 
reductions in publically provided services is the potential protest reactions shown 
by respondents. People feel entitled to the status quo situation and are reluctant to 
accept the trade-off they are asked to do. There is also the potential endowment 
effect, status quo bias and loss aversi on, documented in the behavioural 
economics literature (see e.g. Kahneman et al., 1991). There is no quick fix for 
these related problems. Framing the ques tions as a matter of compensation using 
WTA, is likely, as argued in section 2.2, to make matte rs worse. Our approach 
tried to alleviate the protesting proble m by carefully explaining the underlying 
need to consider the USO and to alert re spondents to the public choice that had to 
be made on behalf of everybody. Based on the responses we got, we cannot say 
that this approach was entirely successful . It seems that the use of CM may not 
avoid the problem either (Barrio and Loureiro, 2010). Further re search is clearly 
needed to quantify welfare losses, as the current financial turmoil would require 
prioritisation among cuts in a number of publicly provided services across much 
of the Western world. Finally, one remaining caveat and as sumption should be discussed. In our 
analysis constant postal volumes are assumed and the analysis is static in the 
sense that the cost savings and losses in consumer benefits are assumed to extend 
into the future. This is a simplification, as the posta l volumes are likely to 
continue to drop and would also be affected somewhat negatively by the service 
level reductions. Some of the consumer bene fits are linked to the direct use of the 
postal services, and the loss in these woul d be smaller for the three alternatives 
than in our base case. This could push alternative 2 into positive welfare territory 
in a few years’ time. A more dynamic anal ysis of cost savings, taking reduced 
postal volumes and efficiency effects ove r time into account, could also imply 
higher cost savings for NP over time. This would pull in the same direction for 
alternative 2. However, it should be noted that we have not aimed to quantify 
potential welfare losses from the sending side for public entities (to the extent that 
those losses are not captured by household WTP) and to larger companies. More 
research is required to pin these down. 25Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
?
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6 Appendix 
6.1 Appendix A 
Figure A Web dump illustration from the web survey of the first WTP question 
(Alternative 1) and the use of pay ment card (In Norwegian). 
 
 26Review of Network Economics, Vol. 11 [2012], Iss. 2, Art. 3	
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6.2 Appendix B 
Table A Regression analysis of log of WTP for Alt. 1-3 (Models I-III) 	
 
 	
Mode l I Mode l II Mode l III
Annual inc ome below 200' 0. 720*** 0.276 0.400 (0. 253) (0.289) (0.305)
Annual inc ome between 200'-400' -0.0461 -0.218 -0. 265 (0. 198) (0.195) (0.201)
Annual inc ome betwene 600'-800' -0. 151 -0. 0652 -0. 259 (0. 164) (0.165) (0.169)
Annual inc ome above 800' 0. 186 -0. 0757 -0. 178
(0. 234) (0.229) (0.253)
Male 0.0913 0. 0171 0. 0999 (0. 128) (0.131) (0.139)
Univers it y educ at ion or more 0. 550*** 0.260 0. 792*** (0. 175) (0.182) (0.191)
Bas ic s c hooling or les s -0.0274 0. 0546 -0. 0585
(0. 148) (0.146) (0.154)
Medium Internet us age 0. 134 -0. 0824 -0. 0576 (0. 203) (0.200) (0.214)
Low Int ernet us age -0. 132 0. 0707 0.104 (0. 192) (0.184) (0.203)
Import ant t hat 85% rule is k ept 0. 574*** 0.325** 0.344**
(0. 161) (0.154) (0.164)
Import ant t hat Sat urday is k ept 0. 377** 0. 522*** 0.339**
(0. 157) (0.162) (0.170)
Today 's s ervic e level is more than needed -0. 637*** -0.595*** -0.591*** (0. 167) (0.154) (0.165)
Res pondent res ides in large c ity 0.0154 -0.153 0. 0425 (0. 163) (0.167) (0.169)
Res pondent res ides in very rural area -0.688** -0.520 -0. 626*
(0. 314) (0.325) (0.334)
Offic al index of degree of c ent ralnes s -0.0364 -0. 0142 0. 0405 (0.0546) (0. 0544) (0. 0573)
Children below age 15 pres ent in t he hous ehold -0. 157 -0.125 -0. 0410 (0. 225) (0.217) (0.243)
Number of hous ehold members 0. 000438 -0. 0218 0. 0308
(0.0872) (0. 0819) (0. 0945)
Age -0.0288 -0. 0422* -0. 0929*** (0.0250) (0. 0249) (0. 0262)
Age s quared 0. 000279 0. 000428 0.000868*** (0. 000260) (0. 000262) (0.000273)
Res pondent aware of 85% rule 0. 122 0. 0783 0. 0392 (0. 145) (0.145) (0.152)
Res pondent s ends let t ers almos t every day -0. 464 -0.368 -0. 0998
(0. 705) (0.754) (0.748)
Res pondent s ends let t ers very rarely -0. 183 -0. 0853 -0. 169 (0. 141) (0.142) (0.149)
Res pondent rec eives let t ers almos t every day 0.319* 0. 537*** 0. 0979 (0. 185) (0.192) (0.198)
Res pondent rec eives let t ers very rarely -0.0922 0. 0301 0. 0442
(0. 177) (0.181) (0.197)
Cons t ant 4. 718*** 4. 836*** 6. 123*** (0. 642) (0.647) (0.667)
Obs ervations 1, 137 1,137 1,137
R-s quared 0. 123 0.095 0.105
Standard errors in parent hes es
*** p<0.01, ** p<0.05, * p<0.1 27Lindhjem and Pedersen: Should Publicly Funded Postal Services be Reduced\
?
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