A new study by a former US Department of Commerce official confirms something that many observers have long concluded – the US Postal Service overcharges its monopoly customers and then uses these proceeds to subsidize unregulated services in direct competition with the private sector. The study, conducted by economist Robert Shapiro, finds consumers are overpaying for regulated monopoly services like first class mail, so that competitive services like package and priority mail can be subsidized – and sometimes the subsidy is as high as 40%.

The Postal Service, as a monopoly provider, has a number of “protected” advantages that firms in the private sector do not have. For one, the Postal Service has exclusive use of residential and business mailboxes, which saves it around $14.5 billion a year in delivery costs. Its competitors are not allowed to have access to these mailboxes and they are not allowed to compete against the Postal Service for these monopoly services. All of this advantages the Postal Service over the private sector.

And, there are other advantages for the monopoly. While the private sector is subject to real estate and property taxes, Shapiro finds the postal service is advantaged by exemptions totaling $2.2 billion. In addition, the study finds the monopoly benefits from exemptions on vehicle and registration fees, road tolls, fuel taxes and parking fees that its competitors must pay. Because the Postal Service has $15 billion (in debt) borrowed from the U.S. Treasury, it avoids $450 million in service costs.

If a monopoly is given financial advantages, it should not be allowed to use these advantages to enter and compete against private firms in nonregulated markets, but it does. Not only is the Postal Service cross-subsidizing competitive services for overnight delivery and package delivery, it has used its monopoly power to startup new ventures to deliver grocery food in competition with Peapod and others, financial services and Sunday delivery.

Another venture by the Postal Service, called Metro Post, promised same day delivery to businesses. By one estimate, the Metro Post trial generated $100 in cost but collected only $10 per delivery. Now we know where the subsidies are going. Meanwhile, the US Postal Service continues to lose money, having lost around $50 billion in the last eight years.

Normally, in competitive markets, when consumers get overcharged, they simply move to another competitor. No so, when facing a monopoly. According to Shapiro’s figures, a 10% increase in “first class letter” monopoly services would result in less than a 2% decline in demand, which means that consumers are unlikely to leave the monopoly and its total expenditures increase. Alternatively, a cross-subsidy that results in a 10% decrease the price of the competitive service “express mail” would stimulate demand by 16%, which takes business from competitive rivals. Effectively, the Postal Service is using its monopoly power to harm private competitors, thereby reducing private sector investment and jobs.

While competitors are certainly being harmed, so are consumers. By using regulated revenues to support unregulated ventures, the Postal Service is price gouging its monopoly customers. The cross-subsidies need to stop or the Postal Service should be required to give up its monopoly protections.

Going forward, regulators should not wait for the next time consumers face an increase in monopoly postal prices. Instead, they should begin now and require the Postal Service to refund consumers for years of overpayments. It is also time for Congress to require the postal service payback taxpayers for the $15 billion in debt held by the U.S. Treasury.

For the sake of consumers, taxpayers and small businesses, the financial abuse by the postal monopoly needs to stop.

A printable version is available on Forbes