 not traditional wire-based, services (table 3-2). Rising expendi- tures on local service, reflecting principally the increase in FCC-mandated subscriber line charges, have not compensated for the decline in long- distance spending, and the result has been a sharp decline in average house- hold expenditures on traditional telephone service since 1997. Why have household expenditures on wire-based telephony fallen in an era of explosive growth of the Internet? The reason must be that revenues from the new uses of the telephone network have not offset the decline in revenues from rapidly falling long-distance rates. 20 Given that the residen- tial demand for local service has an estimated price elasticity of less than -0.05, any increase in local rates would lead to higher expenditures on local services. The modest increases in local rates after 1995, reflecting principally the increase in FCC-mandated subscriber line charges, did not offset the decline in long-distance spending caused by plummeting long- distance rates. The demand for long-distance services has a price elasticity of only about -0.7. 22 Therefore long-distance spending will decline when prices fall, unless the effects of higher incomes and new services are suffi- cient to offset the price effects. The First Eight Years under the New Law Table 3-2. Average Annual Household Expenditures on Telephone Service Dollars/year Long- Total Local distance Wireless Total nonwireless carriers carriers carriers spending spending 1,001 1,055 Source: FCC, Reference Book of Rates, Price Indices and Household Expenditures for Telephone Service (July 2004), table 2.6. Between 1995 and 2002, the average real price of interstate and inter- national long-distance service fell by 51 percent, while the real price of intrastate calls dropped 17 percent.2 Thus average long-distance prices declined by about 40 percent. Assuming a price elasticity of demand of -0.7 and no real income growth, real household spending on interstate long distance should have declined by about 14.