Private Roads and Highways- Why not?

Since many states face a highway funding crisis, some state governments and the federal government are considering proposals to sell highways to private investors. This goes against the the conventional wisdom that roads should be built and maintained by government and funded by taxes. Conventional wisdom, taught in many introductory economics courses, is that roads are public goods. One definition says a good is public if the cost of excluding people who don’t pay for using the good is unacceptably high. If someone builds a road with lots of access points it would be very costly to exclude people who do not pay for it from using the road.

When thinking about charging people to use roads and highways, most people think of tolls. Private firms can and do manage toll highways. Although tolls may work for a few limited access highways, the cost of collecting tolls from the driver of each passing vehicle would likely outweigh the benefits for most roads and streets, which have numerous access points that are close together. But this does not mean that it would be infeasible to privately operate such roads and streets. Tolls are not the only way to charge people for the benefits they get from roads. Residents and business owners could be charged a fee for access to the road or street on which their homes or businesses are located. They could also be required to purchase a license to drive on the roads within a given jurisdiction.

Modern electronic technology makes it possible to charge people for using roads and highways without costly delays associated with collecting tolls manually.Yet even without modern electronic technology, private roads and streets were much more common in the past than they are today. In Britain, roads and highways were built and maintained by monasteries during the Middle Ages. Guilds invested in the construction and maintenance of turnpikes as late as the eighteenth century. Approximately 10,000 miles of private turnpikes were built in the US during the early 19th century. Private investors abandoned most of these when competition from government subsidized canals and railroads reduced their ability to earn enough in tolls to cover expenses.

Most private turnpikes were not profitable for their investors. Investors were often local merchants who would profit from additional traffic attracted by turnpikes. Thus they were willing to invest even though revenues from tolls did not generate a decent return. Private streets were also common in some US cities during the 19th century. Private streets were not supported by tolls, but by an assessment on residents located along the streets.

The paucity of private roads cannot be taken as proof that such roads would not be built in the absence of government subsidies. Few private highways exist because they cannot compete with government subsidized highways. Given the choice between paying a toll to drive on a private highway driving on a government highway at no charge, most drivers would rather drive on government highways than private highways, even if private highways were better quality and had less congestion.The result is a very inefficient system of roads and highways that are more costly than necessary with serious congestion problems in many cities.

Without competition from free highways subsidized by the government, people would be willing to pay to use highways. If the system of roads were sold to private entrepreneurs, they would find creative ways to fund them, just as they did at various times in the past. Whether it be local community associations or merchant associations who collect a fee from their members in exchange for building and maintating roads, or corporations who limit access to expressways and charge toll, people will pay for the use of roads and highways because they value mobility. Furthermore, expressway congestion could be reduced or eliminated by charging drivers prices that vary to reflect the scarcity of highway space during different times of the day. The revenue earned could be used to expand highway capacity in the most heavily traveled routes, thereby enhancing mobility, which in turn promotes widespread employment and prosperity.

Why the Bush tax cuts should not be allowed to expire

Because I am concerned about fiscal responsibility, I am hesitant to advocate keeping taxes low. Nevertheless, as my colleague Shawn Ritenour emphasized in his blog, restoring fiscal responsibility while also promoting a prosperous economy requires cutting government spending, not raising taxes.

Raising taxes from the current level would have harmful consequences in any case, but those consequences are exacerbated by the fact that we are in a severe recession (some say depression). The main problem with raising tax rates is not that it will lead to a reduction in consumption and demand. If anything it will lead to increased consumption, though by government agencies and recipients of government transfer payments instead of the people who earned the money through their labor.

The more serious problem for the economy is how taxes influence production. When a greater share of each dollar earned is taxed away, it reduces the incentive to earn, whether through working additional hours, hiring more workers, or investing in capital. This problem is more serious for those in higher tax brackets, who are more likely to own businesses and have discretionary time and money that they could invest producing more goods and services. It is not spending that leads to economic prosperity, but greater production of what people value, which depends on entrepreneurs having confidence about the future direction of the economy and an expectation of being rewarded for taking risks. This is the key to an economic recovery that will restore prosperity while preserving freedom.

It is doubtful that raising tax rates on individuals with incomes over $200,000 ($250,000 for married couples), as proposed by the president, would lead to a reduction in tax revenue, but it will not lead to a very big increase. Thus if the big spenders currently in control of Congress really care about fiscal responsibility they will let the lower tax rates on the middle class expire as well. This would lead to an increase in revenue that is at least two or three times as large as from increasing taxes only on the those earning more than $200,000, who make up less than 5 percent of households.

Raising taxes on the middle class may actually have a less harmful effect on economic growth and prosperity in the long run than raising taxes on the wealthy, since work and investment by the middle class is likely less responsive to tax rates than that of the wealthy. Nevertheless, uncertainty about which tax rates will be allowed to increase and which will not also hinders economic recovery. Even if the president and Congress say they do not intend to raise taxes on the middle class, their unwillingness to bring spending under control leaves many of us expecting that Congress might raise those taxes out of fiscal necessity. This uncertainty discourages entrepreneurs from investing in capital to expand production of goods and services demanded by the middle class.

A clear commitment on the part of Congress and the administration to extend the Bush tax cuts across the board would remove some of the uncertainty and lead to greater investment and job creation. While such a commitment is not sufficient to address the looming fiscal problems faced by our government, it would be a step in the right direction.