Roads and Public Goods

by Don Boudreaux on May 2, 2009

in Travel

Commenting on this post, Greg Totten said:

Just want to point out that the reason America has been decentralizing
and moving out to the suburbs is in large part cost based due to
Federal highway and road subsidies. If we had never subsidized the move
to the suburbs, would we be there in the first place? As I see it maybe
we should stop fixing all those roads and then see if people still want
to live there. This commentary makes it seem like people made a
conscious economic decision to move to the suburbs, but I believe a lot
of it was cost based.

This analysis is quite frequently made, and it might be correct – or might be incorrect.

This analysis is incorrect if, as many (most?) people claim or simply assume, highways are public goods — goods that the public demands but that private markets allegedly supply only in insufficient quantities.

The reason private markets allegedly undersupply public goods is that, for such goods, private firms find it to be too costly to exclude non-payers from enjoying the benefits of these goods ("nonexcludability").

If the classic theory of public-goods provision is correct, government supplies public goods just as the private market would supply such goods if the private market were not infected with incentive problems that prevent the private market from doing its job in these situations.

So if the classic theory of public-goods provision is correct, the roads and highways supplied by government are not a distorting subsidy to automobile transportation.  These roads and highways are, instead, just what the public wants and is willing to pay for in full — it's just that the alleged public-goods nature of these goods means that they can be supplied in optimal quantities only by government.

Now there are plenty of problems — theoretical and, especially, practical — with the classic theory of public goods.  For example, it assumes too blithely that collective-decision-making procedures accurately discover the publics' true demand for public goods; it overlooks the perverse incentives in the political arena that prompt government officials to act in ways that are inconsistent with the 'public good'; and it turns a blind eye to the many creative ways that private persons have through the years organized themselves voluntarily to supply 'public goods' that, allegedly, would never be supplied privately.

And in the case of U.S. interstate highways especially, the notion that it is too difficult to exclude non-payers from traveling along them is incorrect.

So I'm more than sympathetic to the claim that government provision of roads, bridges, and highways distorted Americans' decisions over the years to drive and live in suburbs.  But my sympathy for this claim comes from my rejection of the classic, naive case for government provision of public goods — and once that case is rejected, it cannot then be used to argue for government provision of, say, light-rail transport.

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{ 43 comments }

Crusader May 2, 2009 at 9:20 am

The theory would be that if tax rates were lower in the 1950s, people would have money to pay for the privately built toll highways. That's assuming they didn't throw away their increased take-home pay on something else.

However, one of the original rationales behind the interstate system was national security.

Tom Kelly May 2, 2009 at 9:31 am

Here in North Texas, roads are arguably very much privately supplied. When you build a subdivision, you must also build your half of the two lanes on each side thoroughfare that surrounds it, plus all of the streets and roads and utilities that are contained within it.

This is a huge part of the cost of transforming 10k an acre raw land into 100k 1/4 acre lots.

As far as the highways go, the three major ones around here are the North Dallas Tollway, the George W. Bush Tollway, and the 121 Tollway. These all got built or extended after there was major development and the local tollway authority decided there were large revenues to be made by getting them open as soon as possible. It has been amazing to watch how much faster the tollways get built than the non-tollways.

So the roads and highways are fully paid for by those that use them- either in the lot/home prices or by tolls. The infrastructure does not cause the growth, it is the result of the growth.

Kevin May 2, 2009 at 9:36 am

As with so many government provided utilities, the answer to the question about the effects of policy can only be speculative. We never had a chance to see the success or failure of private roads carrying thousands of cars every day from the suburbs to the city centers, and if I can speculate for a second, we never will.

So people with an axe to grind may as well ascribe blame or credit for suburbanization to road subsidies. It's as verifiable as every other political assertion about how the world would look in a parallel universe.

Lee Kelly May 2, 2009 at 9:52 am

If the government owned all the farms, and someone suggested that they not, people would say, "but then how would we get food!?".

Gil May 2, 2009 at 10:25 am

Why not entertain the possibility that "yes, roads, streets and highways as we know them would not have been built"? It may be akin to "would the private market put men on the moon"? No, private operators wouldn't waste huge resources on that which has little to no return. Some roads and highways would have been built but only as a response to growing cities (as Tom Kelly noted) but would they necessarily build roads and highways all over the nation for the sake of it? Probably not.

Per Kurowski May 2, 2009 at 10:33 am

Don Boudreaux writes “Now there are plenty of problems — theoretical and, especially, practical — with the classic theory of public goods. For example, it assumes too blithely that collective-decision-making procedures accurately discover the publics' true demand for public goods”

And so if only we had some private public-goods-demand rating agencies… perhaps he might then think that all is solved?

Sam Grove May 2, 2009 at 10:38 am

One notion that we should be able to dismiss is that "only the government can AFFORD to do it".

Steve C. May 2, 2009 at 11:06 am

Chicken meet egg.

I propose a better proximate cause is the impact of WWII.

1. During the war there was little to no investment in housing.

2. As a reward for service, the USG provided no down payment home loans to veterans.

3. Entrepeneurs like Levitt identified an underserved market and created modern suburbs to meet the demand for low cost housing.

4. The people moved, the infrastructure followed.

5. How ya gonna keep 'em stuck in a 4 story Brooklyn walk up, after they've seen a 2 bedroom Massapequa Cape Cod?

Henry Harrison May 2, 2009 at 11:38 am

"These roads and highways are, instead, just what the public wants and is willing to pay for in full — it's just that the alleged public-goods nature of these goods means that they can be supplied in optimal quantities only by government."

True, and also true that all of the problems you cite make it (virtually) impossible for government to supply these goods in optimal quantities.

But does that fact mean that government can't get closer to optimal quantities of public goods than the open market could? In other words, maybe the correct answer is that there can never be an optimal supply of public goods – provided either by the government or by the market – but that the government gets us closer than would the market left alone.

Further, would rejection of the classical theory of public goods also extend to other areas beyond light-rail? Would it mean the rejection of public goods arguments for, say, national defense or police?

Sam Grove May 2, 2009 at 11:46 am

Would it mean the rejection of public goods arguments for, say, national defense or police?

I would reject them in the case of police.
There's a force for local tyranny.

Do police actually abide by the constitution they have sworn to protect, or do they just obey orders from above?

Bill Stepp May 2, 2009 at 12:07 pm

Per Kurowski writes:

And so if only we had some private public-goods-demand rating agencies… perhaps he might then think that all is solved?

You mean private public-goods-demand rating agencies that were granted a cozy little oligopoly by an act of Congress and didn't
have to compete against rating agencies that were excluded from offering their services by the same?

Randy May 2, 2009 at 12:16 pm

Definition of a "Public Good"; Something that the political class wants that the productive class has not been willing to pay for voluntarily. The political argument that a thing is a public good is generally the prelude to an application of force.

K Ackermann May 2, 2009 at 12:32 pm

My girlfriend drove a schoolbus here in Oregon, and she had a total of 11 kids on the bus.

If there was no snow in the high elevations, her route took 1:20 from when she left the bus barn to dropping the kids off. If there was snow, it took an extra 30 minutes between driving slow and chaining up.

She would have to drive the full route even if some kids were not riding because it would mess up the timing and they didn't want to leave kids waiting for their parents, or missing the bus.

It's bad enough each kid used about 3 gallons of gas a day, but there was also a religeous school with a short bus almost following her route, and the farthest student on her route also had a special needs kid that was picked up in a van.

They had every excuse in the book about why they couldn't consolidate. They all boiled down to "we're scared to change", and the editor of the local paper told me to stop writing letters about it.

Laidlaw had the contract for her bus, and they were a rotten company to work for.

Dan Phillips May 2, 2009 at 1:59 pm

Randy hits the nail on the head!

Ray G May 2, 2009 at 4:26 pm

Much of the formation of my own ideals as a libertarian took place upon reading Charles Murray's book.

He doesn't spend too much time on the road issue, but kind of leaves it open. At the time I hadn't thought about it too much, but I began rolling over various scenarios and wound up being nearly agnostic on road per se.

Long story short, if governments at all levels had more spending limits in place that could not simply be thrown out by judicial fiat or mob rules referendums, many of our public goods policy problems would be fixed at the root of the problem.

Lee Kelly May 2, 2009 at 4:26 pm

Kackermann,

Are you suggesting that the U.S. public school system is using resources inefficiently? Nonsense. You have to understand, if the school does not spend all of its money, then it might not get as much next time. And anyway, think of the multiplier of all that spending, just think of the mulitplier!

MichaelG May 2, 2009 at 4:27 pm

It's so much cheaper to build a large house with a yard (the kind that families want) in the suburbs instead of the city, that I'm sure you could charge tolls for every trip to the city and still come out ahead. And as a poster mentioned above, developers do pay for the subdivision roads, so this is paid by the homeowners.

A better question is why it is so much more expensive to build in the city. It's not just that there's more demand for the land. The permit process is generally much slower and more expensive. So if you are blaming government for building roads to the suburbs, also blame government regulation for driving people (and businesses) out of the city.

Eric B. May 2, 2009 at 4:47 pm

If anyone wants an example of complete incompetence in terms of so called public goods look to Chicago. The Metra is wildly inefficient and impossible for suburban travel unless you happen to work next to small town centers or downtown. The toll system is plagued by corruption and forces daily 2-3 hour total commutes. For a city of that size and reputation, its a shame. Up until they were removed, a constant reminder of the dirtiness of whole scheme were large signs with Rod Blagojevich's name as you went under the toll.

The Albatross May 2, 2009 at 5:02 pm

The Usual Line from Per:
Always with the rating agencies, Per, always with the rating agencies—the rating agencies blew it, ergo all organizations not owned or operated by philosopher kings in the government and run by the market are condemned to failure. The rating agencies did what they did because they are not retards. Did they make bad decisions? Sure, but if you bet a million dollars on a ninety percent chance that you will make ten million, then have you made a bad decision? The rating agencies saw securities backed by mortgages—these are historically considered the most conservative and sound of investments (which is why they were bought by those prudish insurance companies). Furthermore, us economists (which is everlasting testament that clever people do not know how to run an economy), almost universally agreed that home prices would never go down (something to do with rising prosperity, second homes, larger homes, dwindling family sizes, anti-sprawl legislation, etc. etc.). I should also add that these securities came with guarantees from Fannie, Freddie, etc. with the subtle (although not statutory) guarantee of federal support. Therefore, if Bubba with a CCC credit rating buys a home whose mortgage is then sold to Freddie and Fannie and guaranteed by them (and wink, wink, the Treasury), then it looks like AAA to any rational human being—except those who can see the future.

Mattyoung May 2, 2009 at 5:24 pm

I got curious and looked up the price changes between urban and suburban residences during this downturn. Zillow compiled the statistics, a sample here:

http://www.zillow.com/advice-thread/Urban-vs-suburban-price-changes-in-Baltimore/37398/

The graph shows prices dropping faster the farther one lives from the urban center. Suburbanites are losing out, if this data holds.

The data also gives us further evidence that we are in this mess because of the gas price bubble.

Per Kurowski May 2, 2009 at 5:24 pm

The Albatross “then it looks like AAA to any rational human being—“

And I have no problem with it looking like an AAA to any rational human being what I have problems with is regulators telling the rational human being that instead of looking through millions of eyes they are better off looking through the eyes of some few (3) credit rating agencies.

Now of course if you believe in the capacity of a central agency to be right (or if you work in one of them) then you must agree with it. I don’t.

The Albatross May 2, 2009 at 5:48 pm

Per,
Agreed, as I said the credit agencies were wrong. However, your frequent posts on this subject imply that there was some sort of logical failure on the part of the credit rating agencies. There was not. They read the intestines and came to a logical conclusion, which any sane person would have thought correct. They were (with exceptions, of course), not stupid, nor greedy, nor corrupt. They gave logical advice. The fact that there are three of them is hardly dispositive—had there been fifty then they would have likely come to the same conclusion—those relying on their ratings likely also gave some thought to the rating—or, at least, that is what the folks I know in the latter biz did. However, the latter saw the same thing—loans based on solid assets. That being said, those who relied on this sound (but evidently erroneous advice) should, of course, lose their money. Sadly, this has not been the case. To tell you the truth, I think you and I agree on a lot. However, I (and I think I could be totally wrong on this point) see your posts as manifesting a belief that the regulatory powers that be would not have made the same mistake. Hey, I am not taking a swipe but that is how it appears—again I think you are right that a central agency would not be very good at this. Agreed, but folks follow poor incentives; and these incentives came from above, so we can’t blame folks for following the road when it was paved by others.
Respectfully,
The ALbatross

Reach Upward May 2, 2009 at 6:49 pm

Light rail does not suffer from nonexcludability. It only suffers from unwillingness to pay full price for it by the producer class. In most cases it is pursued on the superstitious basis of it achieving a higher moral good than could be achieved through selfish and evil free markets. That is, it is pursued in order to repudiate the belief in free markets.

John Dewey May 2, 2009 at 8:25 pm

Don Boudreaux: "The reason private markets allegedly undersupply public goods is that, for such goods, private firms find it to be too costly to exclude non-payers from enjoying the benefits of these goods"

Of course that's true. But with roads and highways, an additional consideration is eminent domain. Private producers would rarely be able to obtain right of way for highways as cheaply as governments can.

jorod May 2, 2009 at 9:35 pm

The middle class moved to the suburbs because the government forced them out of the cities with their socialist housing policies.

John Dewey May 2, 2009 at 9:49 pm

I'm trying to understand the justification of government provision of public goods. Would a economist mind confirming my understanding?

1. One person's consumption of a public good does not prevent others from consuming the good.

2. The public good can be consumed without paying for it.

3. The marginal cost of the public good is zero, or very close to zero.

4. Marginal cost pricing would then imply that the market price is zero.

5. If production of the public good were left to private markets, too little of the good would be produced – because the marginal price is zero.

Is that correct? Is that how eminent domain for procuring right of way is justified?

John Dewey May 2, 2009 at 9:59 pm

Don Boudreaux: "in the case of U.S. interstate highways especially, the notion that it is too difficult to exclude non-payers from traveling along them is incorrect."

Was it too difficult to exclude non-payers 50 or so years ago, when the interstate highway system was first authorized? Wouldn't that have required manned toll booths across the nationwide interstate system? I can see how manned toll booths could be justified for high volume routes such as Pennsylvania or New Jersey Turnpikes. Would manned toll booths work for rural Utah or west Texas?

vidyohs May 2, 2009 at 11:08 pm

Yep, Randy, is right on the money.

Sam Grove May 2, 2009 at 11:16 pm

Something that the political class wants that the productive class has not been willing to pay for voluntarily.

Possibly because the political class has wasted much of the product of the productive class on things that the productive class would not choose to pay for even if they thought they could afford it.

antiplanner May 3, 2009 at 1:13 am

First, people began moving to the suburbs long before the interstate highways were built. Second, the interstates were not subsidized — they were 100 percent paid for out of user fees. So all the theory about public goods is moot.

(And I don't believe roads qualify as public goods anyway — the U.S. had many private toll roads in the nineteenth century.)

Bob Smith May 3, 2009 at 3:42 am

There's a question about "road subsidies" I've never seen answered. We all know that huge fractions of federal, state, and local gasoline excise taxes are diverted to pay for public transit, including buses and light rail, as are portions of the licensing & registration fees paid by drivers. If all of those tax revenues instead went towards road construction and maintenance, would it still be correct to say that roads are subsidized? My suspicion is that, in fact, roads aren't subsidized at all, they are 100% paid for by users.

Alex Durdan May 3, 2009 at 4:19 am

You obviously do not understand why highways were built. Please research the Autobahn. Hitler's malignant road was his most lethal weapon.
Read, Learn, Interpret, Spin.

I know your blog is based on gov't funding for highways but who wants to travel 35mph to California?

John Dewey May 3, 2009 at 9:04 am

Alex Durdan: "You obviously do not understand why highways were built."

Few will dispute that German highways influenced Eisenhower to champion the Interstate highway system. But, to be fair, U.S. highways were being built long before WW II – just not on the scale of the Interstate system. Furthermore, it is unlikely that Congress would have had support for the gasoline tax had there not been a pent-up demand for non-defense transportation in the U.S.

Martin Brock May 3, 2009 at 11:12 am

My suspicion is that, in fact, roads aren't subsidized at all, they are 100% paid for by users.

More like 200%.

Of course, all "roads" are not created equal, so road use taxes (like gasoline taxes) don't only subsidized passenger rail and other public transport systems. The taxes also subsidize roads that aren't used as much as other roads.

Martin Brock May 3, 2009 at 11:19 am

Would manned toll booths work for rural Utah or west Texas?

No. I'm skeptical that automated tolling would work well now, and "private highways" that don't turn a profit would soon become public highways, so I don't see much hope for privatization in this direction.

Isn't a long stretch of highway too big to fail? Would ripping one up to free the land for other uses often be cost effective?

MERLIN May 3, 2009 at 1:50 pm

Would we have 95 Mexican Truckers in the US in the first place without these publically produced roads? Let's follow your thoughts back to the previous post.

Bob Smith May 3, 2009 at 5:05 pm

I'm skeptical that automated tolling would work well now, and "private highways" that don't turn a profit would soon become public highways

That doesn't seem so bad. If a privately built toll road can't make enough money for its owner, giving it away to the government means it gets a nice new road for free. Even if they paid cash to buy it, assuming the government (or a new private owner) paid an appropriately reduced price it could still be a money maker for the buyer.

John Dewey May 3, 2009 at 5:07 pm

antiplanner: "First, people began moving to the suburbs long before the interstate highways were built."

Absolutely, Mr. O'Toole. Tom Martinson explained in American Dreamscape: The Pursuit of Happiness in Postwar Suburbia, p.19, how rail lines freed urban workers from the congestion of 19th century Boston:

"The urban Yeoman eventually participated in this suburban expansion – just as soon as public mass transportation freed him from having to live within walking distance of work. … With the extension of public transportation lines after the Civil War, suburban migration became universal, among all economic classes."

Martinson explained how workers used rail transit to escape crowded, 19th century Boston just as workers used automobiles to escape crowded, post-World War II Chicago. Compared to 1950's Chicago surburbs, houses were larger and lots the same size in 19th century suburban Boston. As Martinson points out:

"This provides a much different perspective from the contemporary notion that suburban "sprawl" is a singular, Post-Second World War phenomenon caused by the automobile."

Douglas2 May 4, 2009 at 12:01 am

I used to rent a room from a man who did aid work in the Congo. His team would hike to the villages of interest from neighboring Burundi, and they noticed that prices in the markets of the villages varied radically — some villages had many excellent basket makers, with very high quality but could not get a high price for their work. In Goma, baskets of lesser quality were much more expensive, but fish were cheap.
Looking for a project to help the people, he bought a pickup truck for a local he trusted, to be paid off from the net income of his fares running an inter-village taxi. He also made known the team's research about the relative prices in the various places. Within weeks he had a phone call from Goma — "what do I do with all this money, I don't feel safe with it" and told the man to buy trucks for each of his sons who knew how to drive. After a few more months all of his relatives had trucks, and he still felt unsafe in a lawless place having so much cash. My landlord asked him how long the journeys took between each village, and suggested that for each km he hire a labourer and buy a shovel. The labourer was to take dirt from the high spots of the road and fill the low spots, and just make sure that there weren't potholes. Before long the travel time was reduced to such an extent that he could make many more journeys in a day, and the increase in fares and cargo more than paid for his salaries to the labourers. Yes, other people would then free-ride on the better roads. But so what! In his short-term he was making more money as a result, and using the proceeds to build his business.

Martin Brock May 4, 2009 at 10:36 am

That doesn't seem so bad. If a privately built toll road can't make enough money for its owner, giving it away to the government means it gets a nice new road for free.

Like AIG gave away its mortgage backed securities? Fat chance.

Even if they paid cash to buy it, assuming the government (or a new private owner) paid an appropriately reduced price it could still be a money maker for the buyer.

Right. I can't wait to read about all the profits the TARP raked in.

The issue is efficiency. Would a quasi-private system of road construction and maintenance really be more efficient, in terms of constructing useful roads and maintaining them at reasonable cost, if proprietors know that unprofitable roads never fail?

Even if proprietors nominally "lose money" when building unprofitable roads, would it make any difference if they borrow the money anyway and simply declare bankruptcy after pocketing handsome compensation during years of construction and initial operation? Would lenders be more discriminating if TARP-like programs often bailed them out?

Would this "privatized" system really be any different from the public system, or would it only create opportunities for nominally "private" rent seekers?

I'm a minarchistic, but I'm not convinced that "private" rents are any less costly than "public" rents. [I don't refer to conventional "rents" reflecting the real marginal value of real capital here.] If market forces don't really operate, then "privatization" only privatizes "profits" while socializing costs.

This more fascistic system is not an improvement over road socialism and seems worse to me. It's a Hobson's choice, but if forced to choose, I'll choose socialism over fascism.

Two distinct theories seek to account for the manifest benefits of market organization.

One theory says that market actors seeking profit just make better decisions than central planners unconstrained by the profit motive. This theory still credits clever planning with the success, but it requires the proper "incentive" on the part of planners.

Another theory says that market actors might as well plan by throwing dice, because the key to market success is creative destruction, not clever planning. In other words, market organization is like evolution by natural selection.

The truth lies somewhere between these competing theories, but I have a lot more faith in the latter than the former.

Martin Brock May 4, 2009 at 10:38 am

Speaking of random mutation. That last post had blockquotes in preview mode, but the tags simply disappeared on posting.

Slocum May 4, 2009 at 12:12 pm

First, people began moving to the suburbs long before the interstate highways were built.

Not only that, they started moving to the suburbs many decades before Americans even had cars, hence the term 'streetcar suburb':

http://en.wikipedia.org/wiki/Streetcar_suburb

And note that such suburbs even predated street cars:

"Although electric streetcars were not introduced until 1887, suburbs did exist earlier based on animal-drawn cars, but the distance they could be from a city core (where most jobs were located) was more limited."

Lastly, there's little doubt that Americans are willing to pay the cost of highway-building — in the form of fuel taxes (some portion of which are, in fact, not spent on highways, but are redirected to subsidize mass-transit and bike paths).

John Dewey May 4, 2009 at 12:43 pm

slocum: "there's little doubt that Americans are willing to pay the cost of highway-building — in the form of fuel taxes"

Many of us pay twice for the highways we use – with fuel taxes and with tolls. Most folks are aware that 15% of Federal fuel taxes are stolen by mass transit. How many know that tolls paid by drivers are also being diverted to mass transit?

Bridge tolls in both New York and San Francisco are currently funding mass transit programs.

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