So let's say all roads are private. This is fine. Road use is allocated by tolls, and the marginal cost of building and maintaining a road can be set equal to the marginal willingness to pay for the use of that road. Congestion pricing even becomes more feasible with lots of private tolls. All wonderful stuff.
But is it?
This is only optimal if we wave our hands when we get to the topic of ability to pay. It's very plausible that there are lots of people of lower means out there whose benefits would exceed the toll but who really couldn't pay it five days a week to get to their job, particularly if it means maintaining a car on top of it. It's plausible that their welfare gains from having a car and using it on a toll road would be considerably higher than someone of more substantial means, so that the only constraint is ability to pay.
Remedying that with substantial redistribution introduces its own problems, because then you're just putting your thumb on the scale of another market. That's no good, but at the same time it's not clear why optimality in a goods market (like the market for toll road use) should be conditional on optimality in the labor market. Why should toll road users have their welfare constrained by ability to pay? Why shouldn't employers have their profits constrained by ability to pay?
I don't think there is an easy answer here.
But I'm certainly reluctant to privilege entirely private toll roads, even if we could internalize all the externalities (which is probably unlikely since there are network externalities involved in infrastructure) as being "optimal" relative to a good deal of open access public roads as long as there's this big wedge between willingness to pay and ability to pay. In some markets, obviously, the wedge is bigger than in other markets.
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Private roads don't necessarily need to be paid by tolls (and in fact, this WOULD be very wasteful), most proposals for private roads I've read involved roads being administered in the form of Consumer Cooperative by the people who use them, in the form of "Road Associations". And beyond the consumers themselves, people who directly or indirectly benefit from roads would have a reason to fund them or subsidize them, business for example needs goods, consumers and workers to reach them, and it's easy to imagine them investing in the Road Associations and helping their workers reach their job.
ReplyDeleteIt's hard to imagine such things ever working, but it's an interesting thought experiment.
This is, in fact, how many private rural highways work in Spain.
DeleteInstead of tolls, people would be rationing with time -- is there any distinction between 'willingness to wait' and 'ability to wait'? You could imagine a worker who needed two jobs, but could only find jobs a couple miles apart with rigid schedules, so the congestion that wouldn't exist under a toll-regime prevents the person from getting to their two jobs. The willingness to wait is there, but the ability to wait is not.
ReplyDeleteWhat is the difference between roads and any other good? Anything can be rationed using time instead of money, and you run into the ability/willingness to pay problem there, as well. If food or cars were distributed using time, I would guess that some people whose ability to pay did not match their willingness to pay would benefit.
Subsidizing road use also seems to eat away at another network good: cities. A public policy that favors cars tends to promote sprawl and make cities less walkable and promotes the sort of sub-urbanization and segregation that leads to other social problems (though this trend is being reversed in some cities).
Roads may be different from other goods, or there may be some sort of socially optimal mix between goods rationed by time, money, and other ways (good looks, moral integrity). The fact that we've reached a sort of social equilibrium where roads travel is rationed by wait times would make me reluctant to do some sort of massive institutional shift, but it might be worth allowing some institutional experimentation.
It's a tricky issue.
Why do you bring that up in connection to toll roads? The exact same "problem" comes up without toll roads, but just with the cost of maintaining the car.
ReplyDeleteAlso, how can their welfare gains exceed the toll but they not be able to afford the toll 5 days a week? I don't want to insult you, but that seems to violate basic consumer choice theory. The welfare gains from paying the toll are the utility of paying the toll - the utility of the second best alternative to paying the toll. The only way I can understand "not be able to afford the toll" is that the second best alternative for the toll money is something like feeding the kids or paying rent or some similar necessity. In other words, the opportunity cost of the toll is higher than the welfare one would get from paying the toll. So their net welfare gains from paying the toll are negative. Maybe I'm not understanding something about what you said.
Only because the last posts had discussed private roads. I think you're right - thinking about optimality in the context of "ability to pay" comes up all over the place, even in markets where externalities aren't a problem at all.
DeleteIf you have time, I would love to read what you think regarding optimality and "ability to pay". In all honesty, I'm not sure what "ability to pay" means in this context.
DeleteThank you for proving my point by deconstructing cost-benefit analysis in order to prove yours. If what you are saying is true, it is an argument for nationalizing EVERYTHING, not just roads.
ReplyDeleteWhat are you talking about Ryan? How can you use this to justify nationalizing everything? Don't you think I've introduced the problems with precisely that solution, even in this post?
DeleteYou're not even talking about demand curves anymore. If you're concerned with the ability of the poor to achieve some utility level, increase transfers. What economic theory in existence tells you that you should instead nationalize any industry you think would benefit the poor if they had more money? You could apply this to anything at all with absolutely no evidence and nationalize it - food, housing, anything you can plausibly come up with an excuse for why willingness to pay and ability to pay are different (which again is not even a thing in economics!).
DeleteAt the most, if you want to be paternalistic and say the poor will blow their transfers on booze and drugs, this would be grounds for "transportation vouchers" or something. Not nationalization.
re: "What economic theory in existence tells you that you should instead nationalize any industry you think would benefit the poor if they had more money?"
DeleteUm, none that I'm aware of (that's not true... I know of a few but they're not good ones). What's your point.
Why are you speaking as if I've advocated nationalizing an industry here?
I agree with Ryan and PrometheeFeu. There are various industries that if private may impose high costs on the poor. If the state wants to provide for the poor then there are two choices here, to nationalize those industries or to redistribute wealth. If nationalization is less efficient then there no good argument for it versus redistribution. The real argument for nationalization must come from externalities or from the nature of the good - is it excludable, rivalrous?
DeleteAre you that thick? Road building is nationalized. All of this has been superseded by my blog post either way.
Delete"It's very plausible that there are lots of people of lower means out there whose benefits would exceed the toll but who really couldn't pay it"
ReplyDeleteHow are you defining "benefit"? If you are talking about consumer surplus, then benefit will be the difference between what you are willing to pay and the price you actually have to pay.
So, in that case, I don't think you could ever have a situation where a person would have would that is unwilling to pay for road access (WTPP).
Maybe you are thinking of a situation where income is redistributed to maximize social welfare? I am not sure.
"It's very plausible that there are lots of people of lower means out there whose benefits would exceed the toll but who really couldn't pay it five days a week to get to their job, particularly if it means maintaining a car on top of it"
ReplyDeleteAre those benefits in the form of money? Then can they take out a loan which they can repay with the increased earnings resulting from access to the road?