Sunday, November 18, 2012

Are Roads Public Goods?

Economists tend to think of the role of government as (1) enforcing contracts, adjudicating disputes as a neutral referee, and providing an infrastructure in which the transactions costs of exchange are low, and (2) acting to correct "market failure" through regulation or direct provision in the case of public goods.

A "public good," as Angus has pointed out a number of times, has two features (or, from a pure market perspective, "bugs").  These are (a) non-rivalness in consumption and (b) costly exclusion.

"Non-rivalness" means that the good is not subject to consumption or being "used up."  If I turn on my radio, that does not reduce the amount of radio waves available for you to listen to.  If the radio signal is broadcast, everyone in the range of the broadcast can listen.  It does not cost more to broadcast radio signals in a city compared to the country, because consumption is non-rival.

"Costly exclusion" means that much of, all of, or even more than the price that could be charged for the good or service would be dissipated by trying to collect the charges.  Radio seems like a "costly exclusion" good, though it is possible to encrypt the signal so that only someone with decoder can listen.  (By and large, commercial radio "solves" this problem by inverting the market:  listeners are the "product" and advertisers pay for access to eardrums.  One ad crowds out another, and it is easy to exclude would-be advertisers who don't pay.  The other model, of quasi-public goods and no commercials, may be solved with voluntary provision, as I argued in this NPR "Planet Money" segment.  Tote bags and coffee mugs for all you good contributors!)

Now:  the question, since we have the setup.... Are roads public goods?  The answer is quite difficult, and there is no one-size-fits-all correct response.  (More after the jump...)

For many "surface" roads, in rural areas, there is no congestion, or at least none unless you get behind a tractor or school bus.  And the cost of collecting fees would be prohibitive, particularly in the era before transponders when you would have need a toll booth at the end of every driveway or building entrance to measure when a car gets on and when it gets off.  So, roads in that kind of setting are pretty close to public goods.  Further, we can charge an excise tax on gasoline, which is close to being a linear fee on intensity of use.  Heavier cars, and trucks, use more gas and so pay higher fees, and even smaller cars use twice as much gas to travel twice as far.  So weight and distance travelled determine how much you pay in fees (gas taxes).  Let's say rural roads look like they could be public goods.

Rural interstate, or limited access, highways are a closer call.  The limited access part means that there are relatively few on/off ramps, and the development of transponders and licese plate cameras with computerized billing reduces the costs of collecting fees.  Still, the use of the highway is generally not subject to congestion in rural areas.  When Chateau, Angus, and I (once with Fred Flintstone) drove across Kansas (to get to the other side, so we could go skiing in Colorado), we spent long stretches of the night watching headlights coming from far away.  Not many other cars out there on I-40 in January at 3 a.m.  So, even though it is possible to collect fees, the marginal cost of road use (once the gasoline is taken out, and already taxed) is very close to zero.  Probably still a public good, though you could argue the point.

But urban, limited access highways?  Please, chile, get out my face.  That's NOT a public good, not even close.  Urban highways are notoriously subject to extreme crowding.  Consequently, the marginal cost of being on the highway is positive.  And it is cheap now to use electronic means to detect and collect road use fees.  These fees can have different levels for different times of day generally, and even be "live," with different charges for different traffic conditions.

So, I have little sympathy for the Angelenos who whine that "freeways should be free."  It's already NOT free.  The only question is whether the driver will pay the costs, or wether everyone else should have to subsidize our spoiled sprawlwart suburbanites.  Not a public good.  Tolls can, and should, be charged.

Of course, there's a catch.  If it's not a public good, why in the name of Boliver T. Shagnasty is the government "providing" it in the first place?  Private roads are increasingly common, in sensible countries.  If it's a public good, government action may be required.  But if it is NOT a public good, I want to know why government is the producer.  There is no market failure to correct.

(With a nod to Anonyman)

UPDATE:  Adam A send this link, and notes that the HOT Lanes had just opened up yesterday.  I did not know that; thanks!


J Scheppers said...

Roads are on a continuum from Public Goods to Private Goods. I would agree that collection costs are being reduced substantially, but still even with electronic tolling, collection cost are in the 15% to 25% of all revenue collected.

The late Herbert Mohring did some great work in demonstrating the optimal congestion user fee would match the capital cost of the roadway. Mohring, H. and Harwitz, M., Highway Benefits(1962). I would add that adding the operating cost would be appropriate to make it truly balanced.

An urban road at 3:00 am may be a more of a public good than a private good based on the demand and that none of the marginal cost of adding 4 lanes to the urban freeway for congestion adds value to the traveler far from the peak hour.

While I agree that an urban freeway is a private good at 7:45 am it is important to note many of these new managed lanes with variable pricing come in with monopsony pricing with a heavy thumb on the scales from the political bodies that sanction their use. There is also a huge cost capital cost to separate the premium service from the payers of time.

It is also worth noting that congestion may be overstated due to miscalculations of fuel costs that are collinear to time costs. Congestion may have a positive influence on reducing accident costs in more congested cities. Looking at the AAA data in Crashes vs. Congestion:

Going from Large Cities to Very Large Cities the congestion cost goes from $487 to $733 per person at the same time accident costs are reduced from $1,585 to $1,406. This implies that increased accident costs could offset 70% of the marginal congestion cost savings.

For the past 10 years the San Antonio Metro government officials have been working on developing seven mile stretch of US 281 in the region. From 2003 to the present the main focus has been a full freeway at a price near $500 million. But due to strong opposition an interim fallback position had to be taken in 2008-2009. The $7 million interim project (US 281 Traffic Study, page 106/116) delivered $19 million in (page 7/116) annual benefits compared with total delay costs of $25 million (Line 38 of Texas Most congested roadways) annual cost of delay estimated by TTI for TxDOT.

At the heart of the matter is what Scott McBride says they are doing in Minnesota on MnPass Lanes “Rather than funding a few big ticket road projects a year, MnDOT's new priority is to take on more smaller projects that deliver 80 percent of the benefits of bigger projects at 10 to 20 percent of the cost”. These two examples are far from what people want when there is no direct payment for the use of facilities, but do shine a huge light on options that provide value with the resources that are available.
Allowing private solutions that do not regulate away the spirit of Mr. McBride’s statement is key to improved efficiency. The redirection and the pooling of current user fees is the more likely culprit of lack of revenue for transportation projects consumer unwilling to pay for improved service.

Solutions that are constrained by what users are willing to pay (for use) focus the resources to more efficient investments. A federal pool of resources has too little user market signaling to efficiently direct infrastructure spending.

AAA Congestion vs Crashes:

US 281 EIS site:

TxDOT 2010 Most Congested Roads:

MnDOT: Star Tribune article:

Dave said...

Even if rural roads are a public good, what's the proper mechanism to ensure they're not over produced?

Anonymous said...

"but still even with electronic tolling, collection cost are in the 15% to 25% of all revenue collected"

Got some data to back this up?

Gerardo said...

The reason for public provision is the transaction costs of cobbling together access rights, I'd guess.

Plus, since public roads aren't a fluid market, the current and future regulatory uncertainty has to be immense. Or so I would suspect. That alone would make it difficult to raise capital.

I always ask my policy class whether roads get built thru poor neighborhoods because it is cheaper to acquire land in those areas, or because poor people are too politically impotent to do anything about it.

If a good is non-rival but excludable, then that suggests natural monopoly, no? The rural highways could just as easily be regulated utilities.

J Scheppers said...

For Anonymous

"Got some data to back this up?"

I reference you to

NCHRP Report 689 "Cost of Alternative Revenue-Generation Systems" Page 20, Figure 8. "Toll-collection costs as percent of revenues"

Kaleberg said...

That's a rather forced definition of a public good. Wouldn't a better definition say something about the impossibility of a pure market economy creating it as it is only valuable in a system which can force everyone to pay? Military defense is by this standard a public good, though some people do better by it than others. Experiments with privatized militaries end badly.

Xerographica said...

Personally, I haven't found debating the technical definition of a public good to be of much use. It's far more productive to debate whether taxpayers should be given the opportunity to put their taxes where their mouths are. What do you think?

Anonymous said...

Talk about strawmen. "public good" is only one (and a very limited) argument for government intervention.

1. So how does one build an urban road without government intervention? To me, purely private means no use of eminent domain, etc.

2. Are you saying that there are no positive externalities with roads? Because if there are, that would be what most consider a "market failure"

Even if roads are not public goods, your conclusions re simply not justified by your logic.

Doc Merlin said...

Digital downloads are the only public good left...
and the free market manages to take care of that rather well.