itive to the relative prices of nodes and links when these types of network elements are substitutes in production. The cost function reflects an efficient combination of network elements given their relative productivities and relative prices. Access regulations that impact either productivity or the purchase costs of network elements will alter the firm's decisions and potentially cause departures from the efficient input mix, resulting in costs higher than the efficient level. Networks in Telecommunications 2. Economies of Scale A network is similar to other production facilities in many respects, including the potential for economies of scale. There are many sources of economies of scale in networks that are identical to those for other types of manufacturing. Some sources of scale efficiencies are specific to networks, however, SO we begin with these. Consider a network with a set of nodes N and a set of links L that specify connections that exist between the nodes. Suppose that the traffic flow on link (i,j) is specified by Xij and the per-unit capacity cost on that link is Cij. Then the network designer must choose traffic flows over the network to minimize the total cost of capacity, which is the sum of capacity costs for all the links in L: C(Q1, The traffic flows to be chosen are subject to the constraint that they complete the connections for the final services Q1 QJ, to travel over available links. For traffic on a network with many connected nodes there are many alternative paths that connect any given origin-destination pair. Given that capacity costs are linear, as in equation (22), the solution is straightforward. The cost-minimizing set of traffic flows must follow the shortest path, that is, the path between initial node i and terminal node j that has the smallest sum of costs Clk. This is the well-known traveling salesman problem discussed earlier. The solution requires the shortest path because the traffic that begins at node i and terminates at node j travels on every link along the path. Cos