Some Thoughts on ‘Bill Shock’ and Negative Externalities

In my paper on the Regulatory Improvement Commission, I argued that adding new regulations was like  tossing small pebbles into a stream. Each pebble by itself would have very little effect on the flow of the stream. But throw in enough small pebbles and you can make a very effective dam.

Why does this happen? The answer is that each pebble by itself is harmless. But each pebble, by diverting the water into an ever-smaller area,  creates a ‘negative externality’ that creates more turbulence and slows the water flow.

Similarly, apparently harmless regulations can create negative externalities that add up over time, by forcing companies to spending  time and energy meeting the new requirements. That reduces business flexibility and hurts innovation and growth.

For example, consider the ‘bill shock’ regulations now under consideration by the FCC.  ‘Bill shock’ is when someone gets a mobile bill that is higher than they expected—say, a large roaming charge.  This problem is annoying but not life-threatening.

In response to consumer complaints, the FCC  invited comments on  regulations that would require “customer notification, such as voice or text alerts, when the customer approaches and reaches monthly limits that will result in overage charges,” and ” require mobile providers to notify customers when they are about to incur international or other roaming charges that are not covered by their monthly plans, and if they will be charged at higher-than-normal rates.”

One question is whether bill shock is a widespread problem. A just-released study, “An Empirical Analysis of Overages on Wireless Consumer Bills” by Recon Analytics suggests that most overages are relatively small and not repeated.  What’s more, in many cases it makes financial sense to take a small overage, rather than switch to a more expensive plan. The study reports that “only 0.3% of wireless accounts go into overage during a year by such an amount that the customer would have been better off having upgraded their plan for that year.”

Now, here’s where we come to the tale of the pebble and the stream.  The rule of thumb about IT projects is that they are always more complicated and take longer than you think.  More precisely, it would be a major and costly effort to build a system that in real-time accurately tracks customer total charges on the home system and on domestic and international roaming systems.  The key words here are ‘real-time’ and ‘accurate’ in the same sentence—the two together translate into expensive.

The bottom line is that if the bill shock regulations are enacted, significant resources—IT personnel and dollars–would be diverted into building and maintaining this real-time/accurate charge tracking system. The number of beneficiaries—the people who are truly surprised by ‘bill shock’– would be relatively small.

What’s more, these are resources that would not be available for innovation and improvements to the whole network.  This negative externality—the potential slowdown in innovation and the pace of network improvements– is not measured as part of conventional cost-benefit analysis. Depending on how many other regulations are being enacted, it could be another pebble that helps dam up the stream.

Indeed,  this suggests we should not evaluate regulations one at a time, but rather as part of a larger context. Think of the impact of a regulation as the net benefit of that regulation plus a negative externality E. That negative externality sums over all regulations on that industry.  The more regulations, the bigger the negative impact.

From that perspective, in order to meet President Obama’s goal to eliminate regulations that hurt job creation, conventional cost-benefit analysis is not enough. Agencies such as the FCC need to  look skeptically at the bill shock rule and other borderline regulations that could impose genuine negative externalities on job growth and innovation without helping many people.


  1. Cry me a river for all these businesses that make a buck with hidden charges or complex and opaque fee schedules. On this particular subject matter I agree it would be more effective to legislate upfront fee schedule and service level disclosures as well as prominent advance notification of change of terms than “fixing” the issue after the fact with account charge monitoring.

    Aside from that I don’t believe that there are unreasonable technical challenges. With calling cards you can trivially get the account balance. Of course there is an expense to maintain additional procedures. Carriers can offer account status checking as an add on feature, in addition to fee transparency.

    But then we know transparency on the side of the business is “bad for business” as having to disclose things you’d rather not advertise may make your terms less attractive to customers.

  2. cm, do you use a bank with no annual fee but with lots of charges if you bounce a check or transfer your balance? Do you use credit cards, all of which make a huge portion of their revenues from fees? Then you are patronizing companies just like these cellular companies. The fact is companies do this stuff for a reason: if they can get away with charging a few people disproportionately but charge the average customer less as a result, meaning you can sign up a lot more customers, it just makes good business sense to do so. I found a good chart illustrating how 10-20% of bank customers drive all the revenues for free checking plans, middle-range customers like yourself are actually unprofitable. I always find it funny when people like you fulminate against these plans then blithely use them all the time, when beneficial for yourself. Even more hilarious is when all the lefties in tech go nuts about “regressive” taxation then make their living on online ads, which are the most regressive tax of all as only idiots click on them and then buy stuff. There’s a reason why AOL and Yahoo are known to convert very well with ads, only dummies still use those services.

    Of course, there will be big changes in the coming years. I’ve been using internet-only checking for years; they pass the cost savings of not having to meet me in person along by paying me interest on my checking account. 🙂 The financial sector will be radically transformed. After all, it’s fundamentally an information business, and we know what the internet does to information businesses. 😉 I agree that notifying users of overage is not a technical issue, it’s probably more of a political/economic one. The cell carrier you’re with doesn’t have much incentive to notify you you’re off their network and racking up fees for them, and of course neither does the outside cell carrier that filled the gap in coverage. The solution to all this is better consumer product information online, which is inevitably happening. The notion that you can regulate your way to better outcomes is fatuous at best. The housing bubble happened despite tons of financial regulations that were supposed to keep the financial markets “safe.” Businessmen will always come up with new ways to make money off unsuspecting consumers: if consumers aren’t smart enough to push back by informing themselves, nothing, including government, can help them.

    • You may be arguing a strawman. To just pick out your example of bounced checks, I have no beef with (reasonable) charges for disruptive transactions that cost everybody along the chain follow-up effort especially when it can be reasonably assumed they are not in good faith (like habitually floating checks). I was specifically aiming at charges or restrictions, or changes of terms, that are not routinely disclosed, and where it often seems an effort is made to keep them under wraps. I once got a communication from a card company containing various unfavorable changes of terms and new fees that would take effect unless you decline them. It was (IMO deliberately) designed to look like junk mail, unlike e.g. card bills, presumably so people would be inclined to discard it without inspection. I declined the terms and the company terminated the card when the term was up (which was expected). You can say it was just an offer of negotiation, or you can call it deception.

    • On the point of customers informing themselves, that’s precisely the point. This is where you need disclosure laws. There are many ways to obfuscate, e.g. disclosing terms only verbally or after specific inquiry, or making it difficult to obtain the full information, like having to chase through multiple people, having calls connected from one party to the next, etc.

  3. cm, it’s not a strawman because I do feel that a fair amount of those bank charges are unjustified, particularly the transfer fees in this electronic age. Look at that chart I linked to: it’s kind of sad that the banks are making a significant portion of revenue off poorer people through such fees, all so the middle-range people who’re better off don’t pay anything. Like you, I want people to pay for what they actually use but unfortunately, the reality of marketing and how people often blindly opt for “free” plans leads to distortions like “free” checking being common. As for your example of your card company “disguising” their change of terms, that’s marginal at best. As long as they sent you a communication with their letterhead, you should be reading it. The reason it might get buried in junk mail is actually cuz the govt postal service doesn’t allow you to block such junk mail, presumably because they are losing so much money these days that they’ve decide to go from the USPS to the US junk mail service. 😉 I don’t doubt that some kind of deception goes on all the time, but it is up to the consumer to hold companies accountable for it.

    I disagree that you need disclosure laws to get information. If you’ve gotten to the point that you need law to compel disclosure, you’ve already failed the market test of consumers compelling disclosure themselves and voting with their money. The notion that you can do anything useful at that point with disclosure laws, which will only be ignored by the same consumers who didn’t care enough to ensure such disclosure in the first place, is just naive. The good news is that with the arrival of the internet, the costs of putting info from private, Consumer Reports-style organizations in front of the consumer have dropped a great deal. Websites like allow people to easily pool such info: I found out about Newegg on that site years ago and have been buying my computer parts online almost exclusively from newegg since. 🙂 The solution for consumers has always been Consumer Reports, but now it will happen much more because everyone will have the info at their fingertips.

    • It wasn’t buried in junk mail. It was apparently designed to look like junk mail with no prominent indication of legally relevant content. It looked different from account statements. I opened it anyway.

      As for your stance on “free market” as opposed to minimal standard legislation, consider the perspective that common legislation (and credible enforcement) removes uncertainty by giving confidence to players that if they cooperate on whatever the law stipulates, so will others. Otherwise there will be concerns that honest players will be taken advantage of by manipulators. That’s the essential role of governance as the arbiter of baseline rules.


  1. […] Mike Mandel has written a lot about regulation and its stifling impact on economic growth. Mind you, he’s not against regulation per se, just the mindless imposition of regulations without regard to their impact beyond the narrow issue that they address. […]

  2. […] Michael Mandel has offered a useful analogy: new regulations [are] like  tossing small pebbles into a stream. Each pebble by itself would have […]

  3. […] only when it is combined with other rules that big problems emerge. This is a great illustration of Mike Mandel’s Pebble Theory of Regulation (of which I am a recent […]

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