Road privatization

July 2005

The highway bill passed Congress recently, bestowing $286.5 billion in pork on all 50 states. Over 6000 projects are delineated in the bill, including a bridge to an island with 50 residents. It’s almost enough to make a fella want to hand over control of the highway system to a private company (hmmmmm).

I like the idea of road privatization on the surface. The road system is similar to the mail system in that when it was instituted, there wasn’t really a private company that had the necessary capital to take on such a project themselves. Now, however, we have FedEx and other shipping companies that do have that capital for shipping, and which would undoubtedly have branched into mail delivery were it not for the government monopoly. Why not the same for roads?

There are a few considerations here:

One is that a well-oiled transportation system confers a large positive externality on everyone, like it or not. As long as the economy depends heavily on the transport of goods and people (which is becoming less true, but still), any company that invests in building and maintaining the road system would not be getting all the benefits that resulted. This quality makes the road system one that lends itself (again, like it or not) to being a government enterprise, since the government has the power to extract taxes in exchange for this benefit. However, everyone benefits from a well-oiled FedEx system as well, and while the two systems are no doubt related, FedEx doesn’t seem to need to exact additional taxes (hmmmm).

Let’s say I run a private company whose business is the building and maintenance of roads. Since, as I said, the government doesn’t tax gasoline to discourage its use, let’s also say that there is no longer a tax on gasoline. It is now my job to collect some sort of user fee as a revenue stream. Some considerations for Andy the CEO:

I set up a toll system for all of my roads, a la EZ Pass in the Northeast U.S. Rumor has it that the technology used here is getting better so that it’s no longer necessary to even make cars to slow down that much. Essentially the same thing as a gas tax, a user fee, but if I invest the technology, it’s no longer such a blunt object, so to speak.

As a side result, roads that cost more to maintain cost more to drive on. Makes sense. If the gas tax is like attacking the problem of user fees with a sledgehammer, this technique is more like a single jack. Much less blunt.

My revenue stream is directly correlated to the number of cars I attract. More cars, more revenue. As an environmentally conscious CEO, this makes me a little worried. My incentive is to just pave as much as I can and slap lane lines down, right? But I don’t have unlimited resources. Since this is a private enterprise, my company now has to pay the full costs of acquiring the land we want to pave. If it’s not worth the extra revenue it’s going to bring in, it doesn’t get done. In addition, many people are going to make sure that it is hard for me to just grab up all the land I can, especially if it’s ecologically important land, and also make sure that there is at least some kind of disincentive to account for the negative externalities that more and more cars bring.

This makes me study very carefully the effects of adding a road or a lane on the system as a whole, and more specifically, the effects on the profits of the company. If, and this is admittedly a big if, the negative effects of the road take the tangible form of a disincentive for me to build more, then the profits of the company will translate into the benefit of the system. Even if the negative effects aren’t completely accounted for, there will still be the incentive to grapple with the very difficult issues of whether adding another lane or road is really “worth it,” rather than just adding a few lanes, watching the traffic fill them, and then saying, “See, I told you there was demand there.”

I am still hopeful that privatization of roads would lead to, as biopolitical puts it, “less pollution, less asphalt, and less taxes,” though. The tough issues that would result would be smoothed out if the jump, which is a big one, is made, especially with the market incentives that would result.