I was recently having a discussion about transportation policy with a respectable economics professor of mine. I asked whether he considers highways to be examples of public goods, he did; but his case was weak, in my opinion. Below is my case that highways are not public goods and should not be treated as such in economic analyses.

(from flickr user Nitro101)


Before I proceed, I should probably define a public good. From Wikipedia:

In economics, a public good is a good that is non-rivalrous and non-excludable. This means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good. In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.
I've heard two examples which I think best illustrate the nature of a public good. The first is an Independence Day fireworks display. It's nearly impossible to sell tickets to a fireworks display because the show can be seen by anyone within a reasonable distance from the source; and my watching the fireworks display does not make the show any less enjoyable for the person standing next to me. The second example is a lighthouse. After being constructed, any boat passing by will benefit from the existence of the lighthouse, but it's very difficult to attach a price-tag to this privilege or exclude a boater from taking advantage of it.

So the argument extended to highways is that they are (1) non-rival because whether there is one car on the road or two, both will get to where they want to go, and (2) highways are non-excludable because anyone who wants to use them can just go ahead and use them. Both points are misleading and arguably incorrect.

Highways are non-rival only in the sense that anyone who wants to enter a traffic jam is theoretically able to do so. They fail the non-rival condition for this reason: my use of a highway reduces the ability of someone else to efficiently use that highway. Or think of it like this, in an ideal world, you could drive 20 miles on a highway in 20 minutes, but in reality, the more people who use the highway, the longer that trip takes, and in many cities, traffic jams are the rule, not the exception. In fact, to plot the relationship between number of cars on a highway and trip time would look more like a power-function than a linear-function. Only in an ideal world are highways non-rival, and the ideal world is not synonymous with reality.

Highways are only non-excludable because the dollar-and-cents price is artificially fixed at zero. This ignores the fact that not everyone owns cars or that pedestrians and cyclists are typically banned from highways. Nevertheless, once any toll is attached to a highway, it becomes excludable on the basis that people can be priced out. A fireworks display is nearly impossible to sell tickets to because no single person or organization has jurisdiction over enough area to prevent people from moving someplace else and watching the display. Highways have specific entry and exit points where toll-booths (or electronic tolling zones) can easily be established.

Ultimately, my argument is that highways are private goods that are priced incorrectly. Economic theory typically argues that taxes are an appropriate means to fund public goods because it's too difficult to get users to pay; but when applied to highways, highway operators don't want to (or are politically motivated not to) charge tolls, not because they can't practically do it. It may be true that local roads are public goods, but limited access highways are a completely different beast. It's not correct to lump anything a car might drive on into one category and simply call them "roads" or "streets" because they serve very different purposes and have very different implications for urban design.

2 comments:

    "In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; "

    There is. Information. Text. Pictures. Data. This blog. :-)

    This is why copyrights and patents are so pernicious. They attempt to convert a 100% non-rival, non-excludable good into a rival, excludable good. It hurts everyone.

     
    On October 18, 2012 Anonymous said...

    Public goods are not literally "non-rivalrous," as pointed out. Air and water can still be polluted, lakes can be overfished, etc. Otherwise there would be no such thing as a "free rider problem."