f wholesale transaction costs exceed avoided retail transaction costs. The fact that such costs may be negative should suggest that compelled whole- sale access can be inefficient in a network industry. This is particularly likely when the ILEC continues to provide service to final customers. Such inefficiencies might not deter the FCC because the agency is charged with enforcement of the Act regard- less of economic efficiency. Also, wholesale access is directed at other policy goals, such as increasing competition in local exchange services, allowing other carriers to develop brand recognition and to bundle local exchange services with other ser- vices such as long distance. However, achieving its other policy objectives does not relieve the government from the obligation to compensate the ILEC for additional transaction costs of wholesale by netting those costs with avoided retail costs in calculating wholesale access rates. If the avoided costs turn out to be negligible or negative, there is little room for other carriers to enter as resellers due to the costs they will incur in marketing and sales and in transacting with the ILEC to procure the wholesale services. The FCC should resist the temptation either to tax the ILEC due to improper calculations of avoided costs or to subsidize the CLEC from some other source of funds such as new taxes on telecommunications services. Instead, regulators should draw the appropriate conclusion that some forms of vertical inte- gration can be cost-efficient relative to market transactions. Delegation of retailing to other firms should be voluntary SO that network firms can choose between distribution contracts and vertical integration based on their relative efficiency. Economic Effects of Regulating Access to Networks 3. Interconnection Access Interconnection access involves somewhat different transaction costs than other forms of access. For example, under wholesale and retail access, access is provided solely at the edges of networks, where customers receive their serv