ts because costs are expenditures on the most efficient combinations of inputs needed to produce final outputs. It is important to emphasize this distinction because unbundled access regulation seeks to determine final costs of the network based on inputs. The network element approach is flawed Voice Figure 2.11. A change in the input mix shifts the PPF. The Design and Costs of Networks because costs are necessarily driven by outputs. This section considers the cost function of networks and proposes an approach to costing unbundled access. 1. Derivation of the Cost Function The costs of networks refer to the total economic cost of producing the network's final services. Let (Q1, Q2, Qj) represent the outputs of a network that provides J types of services. Then the costs of the network are based on the level of each type of service, C(Q1, Q2,..., Qj). The economic cost of a network, as with cost functions for any type of firm, is based on final outputs. The cost function of a network, as with cost functions in general, is obtained by minimizing the input expenditures needed to produce a given set of outputs. Expenditures are minimized by choosing input levels that are subject to a produc- tion function constraint. In what follows, let N be a vector of capital equipment associated with the set of nodes and let K be a vector of capital equipment associ- ated with the set of links, and let PN and PK be price vectors associated with these two types of capital equipment. Let the prices of other economic inputs (land and resources, labor services, and other parts and components) be Px, PY, and Pz. Sup- press any parameters that describe network performance, because these are implicit in the network production function. The network's total cost function is therefore derived as follows: (12) C(Q1, Q2, , QJ) = maxn,K,X,Y,ZPNN + PK + Px X + PY (+pzZ subject H(Q1, Q2, , QJ, N, K, X, Y, Z) = 0. The cost function depends implicitly on the input prices and on the technology, as represented by the production function. 13 The cha