Should Verizon be allowed to charge Internet content providers?

I have long feared this development:

Verizon, Comcast, and their ilk have been lobbying Congress to transform the Internet into a two-tiered system. By tagging content, broadband providers would ensure that their own packets (or those from companies paying them protection money) get preferential treatment and reach subscribers faster than second-tier content. This would give companies like Verizon a tremendous advantage as they roll out their own television and VoIP telephone services.

Telco-cable companies have spent billions to lay down broadband pipe and want a return on their investment. They are tired of bandwidth hogs like Google, Amazon, and Microsoft getting a free ride. This was fine when the Internet consisted mostly of e-mail and static Web pages. With the advent of online video, Internet telephony, and IPTV, Verizon, AT&T, and BellSouth want content providers to share the cost. Their reasoning: If Google is going to introduce a video service, shouldn't it have to pay for some of the bandwidth it scarfs down?

...If the telcos and cable companies get their way, we'll have a Balkanized Web. Content providers who can afford to pay for premium service will market superior products to consumers with fast connections. Everyone else will make do with second-class companies at second-class speeds.

There is much more in this fascinating article.  In purely economic terms, the idea of charging Google or other "bandwidth hogs" does not sound outrageous.  (What would the incidence of such a price hike be?  Would cable connections become cheaper, or do the cable companies have too much mononpoly power?)  But in public choice terms, this would bring politically-influenced pricing.  Don't expect porn or blogs to get a break.  The net would become much more corporate.  The perils of regulation aside, Verizon probably would favor its own products, and no, Harold Demsetz never disproved this tendency. 

The beauty of the status quo is that web sites compete on the basis of consumer surplus alone.  The bandwidth costs end up as a fixed charge on net access as a whole; I suspect this hits many inelastic demanders, a'la the Ramsey rules for optimal taxation.  Admittedly it may be a bad deal for the poor who cannot afford to connect, but the overall arrangement enhances the long-run "competition of ideas" feature of the net.

One second-best solution is to charge users for bandwidth per se, while not discriminating across differing uses of that bandwidth.  In essence this would tax file-sharing while leaving most content decisions unaltered.  Alternatively, a tiered net could lead to more Wi-Fi networks, whether at the municipal level or constructed by Google.  If that is where we are headed anyway, this apparently troubling development could rebound to our collective advantage.  We might end up bearing the fixed costs of the transition sooner than is optimal, but again the dynamic benefits of the new arrangement might swamp that problem.

Comments are open...will my free market readers defend Verizon's right to charge Google bandwidth fees?