Privatizing Roads

When I explain public goods to students I explain 2 basic traits:  Public goods are non-rival and non-excludable.  Non-rival just means that if I consume the good it doesn't prevent you from consuming it.  Think clean air.  Non-excludable just means that the supplier of whatever it is we're talking about can't prevent you from consuming it once it is supplied.  Think national defense.  At this point I usually ask the class to think about the types of goods that local governments pay for that would fit the definition of public goods.  Invariably, someone says roads.

But are roads really public goods?  Sure they are usually publicly provided, but should they be?  Usually, public funds are used to supply public goods because private firms can't profit from providing the good.  If I can't prevent you from consuming national defense once it is supplied, what incentive do I have to provide it? 

But roads are neither non-rival nor non-excludable--take a minute to figure out all those negatives.  Let me say it this way.  Roads are excludable and in some cases rival.  Toll booths act to exclude drivers from certain sections of roads and as roads become more congested, my driving on a particular road may prohibit--or at least slow--your driving on the same road.  So, if roads don't have any of the characteristics of a public good, why do we use public funds to supply them?

It looks like politicians are starting to ask the same questions.  From the AP via the Columbus Dispatch:

Indiana officials hope to sign a lease this spring with a Spanish-Australian partnership that would operate [I-90] for a profit for the next 75 years.

The company would keep all toll revenue. In return, it would be responsible for maintenance, improvements and other operating costs, and would pay the state $3.85 billion up front - money that would go toward other road and bridge projects.

[...]

Privately operated toll roads are slowly catching on in the United States after decades of popularity in Europe and, more recently, South America, Australia and other nations. The roads are attractive to investors because they offer long-term, stable revenue from tolls.

Last year, Chicago became the first U.S. government entity to lease an existing tollway to private investors. The city turned over the 7.8-mile Chicago Skyway to the same Spanish-Australian consortium for 99 years in exchange for $1.83 billion.

By this fall, about 30 of the 5,244 miles of U.S. toll roads will be run by private operators - the Chicago Skyway, the Dulles Greenway in northern Virginia and the South Bay Expressway, expected to open this fall near San Diego, said Patrick Jones, executive director of the International Bridge, Tunnel and Turnpike Association.

The objections?

Opponents worry that tolls could rise sharply or that road maintenance would suffer.

Tolls are already set to go up under an unrelated plan, jumping from $4.65 to $8 for cars this year, and more than doubling to $32 for big trucks by 2009. Under the privatization plan, however, people living in the seven counties that the highway traverses would be exempted from the toll hike and would be spared any increase for 10 years.

Indiana House Democrats also say it is bad public policy to sell off or lease a major public asset to a private venture, particularly a foreign one. They note that the venture could recoup its investment in 17 years, then make $21 billion in profits over the next 58 years.

"That is money that could go to our children, our grandchildren and our great-grandchildren," said House Minority Leader Patrick Bauer of South Bend.

Why would we want a private company to profit when the Indiana state government could? (sarc)  Personally, I like the idea of private pay as you go roads.  Of couse the roads will always be state-owned because only the state has the means to procure the land necessary to build roads--eminent domain.  But once built, why shouldn't the roads be competitively priced?  It could relieve congestion and provide incentives for more mass transportation.  Both good ideas in my book.

Comments

[Dano]

Germany ensures that road maintenance won't suffer by first ensuring that - as opposed to Murrica who does this by lowest bidder - contracts for roads are awarded to firms with the best track record for efficiency and reliability.

I don't know if they continue to wield power by requiring a post-construction maintenance bond.

Best,

D

[joshua corning]

Of couse the roads will always be state-owned because only the state has the means to procure the land necessary to build roads--eminent domain.

so little you know grasshopper.

There are countless railroads that had to be purchased peicemeal at a time. (not all but some)

Anyway when you talk about roads you mostly mean freeways...I think a better start would be county roads and neighborhood streets. I belive the term is "vacate". Then set up a property owners road maintenace agreement.

Of course with county and state and federal road standards this would never be an optimal approch for the property owner...you got to give to recive. or give up governmemt control as it were.

[David]

They might not be public goods but are they - for all practical purposes - natural monopolies?

[Tim Haab]

Joshua,

You're right. My lack of specificity makes my argument somewhat misleading. My point was not that current roads can't be privately owned, but rather it would be difficult for a private firm to build a new road because of the inability ot acquire all of the property.

And you are right, I was mainly talking about freeways.

See I do know somethings. I just obviously can't explain what I'm thinking.

[joshua corning]

They might not be public goods but are they - for all practical purposes - natural monopolies?

Well exept from where I am sitting there are 2 way to get to Seattle that take about the same amount of time and three ways to get to Portland that take the same amount of time.

And that does not include taking a plane, bus or train.

What "practical" purposes are you thinking of?

[Adam]

On monopolies:

If you are talking about freeways, then maybe they aren't monopolies. However, if you are talking about local roads, they (probably) are.

Also, if the owner of the freeway can prevent others from building across/under the freeway, then the freeway becomes much more monopolistic (can't get from one side to the other without crossing the freeway)

My 2 cents from what I saw in China. Almost all new-built (since about 15 years ago) freeways in china are toll collected road, no matter they are private invested or State invested. The results: high tolls without any effective regulations and extremely high profit even for local government. Roads normally are natural monopolies.

[Dano]

if the owner of the freeway can prevent others from building across/under the freeway, then the freeway becomes much more monopolistic

The owner of the freeway is a jurisdiction - sometimes county, usu. state or federal. and is subject to laws protecting public safety and property.

So the law is the monopoly power over surface transportation. Of course the law can be changed, making such discussions problematic.

As the issue arose way back in New England in the early 1700s because people were building their houses in the middle of cart paths, thus impeding trade and livelihoods, law is well-established with regard to interfering with surface transportation. This is part of the reason why there is monopoly power - consistency.

Certainly we wouldn't expect a private firm to pony up the capital to fully build anything other than a local access road [maybe part of an arterial], so this discussion is maybe academic for Tim's kids...

As for the competitively-priced thingy, that idea is starting to gain traction as time is becoming a scarce resource for exurbanites with long commutes (micropolitan dwellers who are increasingly red voters).

Best,

D

[Pete]

I always thought that transaction costs were one main reason roads were publicly provided. Notice that on toll roads there is less access points then freeways. Also there is the wage cost of a toll collectors and time lost waiting in line at toll booths. I know that technology has gotten better (fast pass) but transactions cost are still high. Yet I think taxation collection still has lower transaction costs i.e gas tax.

By the way I tell my class that a road fits all four categories given different situations: Private--toll road in Chicago in the rush hour, Club--toll road such as Ohio turnpike no conjestion, Common Property--freeway in LA in the rush hour and Public good--I80 through Iowa.

[Robert Schwartz]

"toll road such as Ohio turnpike no conjestion"

We have had the worst of both worlds. High tolls and state quality.

[Larry Eubanks]

I posted a comment on state parks the other day suggesting that the best way to think of a state park was as a club good. I have the same suggestion about roads. A road is excludable and consumption of a road is shared. Yet, consumption of the road is subject to congestion. These attributes of roads fit the club good model very well.

So, I would ask a somewhat different question: Why should we have a publicly provided club good? One answer that economists have suggested is that the presence of significant scale economies would mean that a privately provided club good would not be efficient.

Of course, having a publicly provided club good is no guarantee of efficiency either. Maybe we have publicly provided road clubs for reasons other than economic efficiency?

By the way, I agree with Tim's comment on eminent domain if we are talking about what the power of eminent domain should mean. Unfortunately, as the Kelo opinion illustrates, the eminent domain power does not have to mean, in practice, that property cannot be taken for private use. Here in Colorado there seems to be a statute the specifically grants government's power of eminent domain to private entities who want to construct a highway. This has encouraged what is known as "the big slab" proposal for a private highway to be built east of I25 between Colorado Springs and Denver.

[David Jeffery]

Joshua, I can tell you that in Australia there is pretty much only one way to get between any two cities. Once there's one freeway there's bugger all point building another one.

Main arterial roads through Australian cities are the same. Going through the back blocks isn't much competition, except maybe for one I can think of that is really congested.

There's lots of private toll roads and I can tell you that whether or not they're natural monopolies, they're always monopolies - the toll owners get clauses written in requiring the roads authority to close entrances to the toll road to any roads that might compete and provide for compensation if the government introduces any other roads or public transport measures that take traffic away from the tollroad.

Which all makes me think it might be more efficient to just leave them operated by the government.

[joshua corning]

This is actually interesting. I go to County Commissioner meetings on tuesdays and one of the commisioners is on a board looking at saving railways...the best they came up with is subsidies. Aparently the railroad cannot make enough money to maintain thier rails. Thinking about it I came up with the fact that trucks (trains main competition) do not have to pay (they do but they also share costs with other tax collection) for thier "rails" (roads) and will always have an economic advantage to trains so long as roads are publicly owned.

Anyway I just wanted to share that.

By the way roads can never truely be monopolies so long as there are trains and airplanes.

It is sort of like calling microsoft a monopoly when apple and linux in the market place or cable when there is satellite and internet and video stores and broadcast and radio and video game consoles and movie theaters.

hmm I think this whole discussion has pushed me strongly into the privatizeing roads camp...I was only playing with the idea before.

One more thing...it has not been considered that the roads could be owned by the people who use them the most.