All Commentary
Thursday, August 1, 1996

Roads in a Market Economy

Roth Argues for a More Efficient Transportation System

Mr. Semmens is an economist with the Laissez-Faire Institute in Chandler, Arizona.

No one has labored longer than Gabriel Roth has in the pursuit of a more efficient transportation system. For over 40 years he has been analyzing problems and suggesting solutions. Most of this work has been in the form of shorter policy studies, conference presentations and papers, and magazine or journal articles. This book endeavors to present a more complete and comprehensive exposition of his views on how roads might be more effectively operated for the benefit of both users and the larger society.

The current methods of financing and operating roads are less than optimal. While there are “highway user taxes,” they are levied in ways that do not take full advantage of the commercial potential that “pricing” the roads offers. Highway user taxes do not vary with traffic demand. As a result they cannot serve to ration demand. Highway user taxes have an inconsistent relationship to the costs incurred to serve various users. As a result, users who impose high costs on the system are encouraged to demand more service than can be provided with existing resources. Investment decisions are similarly diverted from the optimum because they are not driven by the need to serve customers in order to earn a profit.

Mr. Roth’s solution to the deficiencies of the current public highway system is to “commercialize” the roads. He distinguishes this from “privatization” by allowing for public as well as private road corporations. His model for a commercialized road system is the telephone market. Each road corporation would have a defined territory within which it would operate as a business. As a starting point, he suggests that state highways would be incorporated into a single business within each state. County roads and city roads would also start out as geographically defined monopolies within their respective boundaries. Compared to a competitive “ideal,” these geographically circumscribed monopoly businesses might be prone to less than full efficient operating habits. Further, since Mr. Roth’s model would permit new entrants to the market, the source of potential competition should help reduce monopoly abuses. However, a more relevant standard of comparison is the current system. On this basis, Mr. Roth’s solution would likely be an improvement.

Mr. Roth’s basic requirements for a commercialized road system include the following elements:

1. The roads must have owners. As beneficiaries of the increased value of the asset, the owners will have strong incentives to nurture and improve the roads. This stands in contrast to the current system wherein the roads aren’t really owned by anyone. As a result the roads are alternately overbuilt and neglected.

2. The roads must be financially self-supporting. The only means we have of knowing whether resources are used wisely is if the customers willingly pay the full cost of their deployment and use. The current mixture of user and non-user taxes and cross subsidies undermines the wise deployment of resources.

3. The law must not discriminate between publicly owned and privately owned roads. If there are user taxes, privately operated roads must have access to a pro-rated share. In the current system, the users of privatized toll roads get no return on the gas taxes paid for fuel burned while driving on the toll road. To the contrary, the users of privatized toll roads are compelled to fund “free” public roads that may unfairly draw customers away from the toll road.

4. Revenues must accrue to those who earn them. That is, fees imposed on road users must be paid over to the road owners rather than being diverted to some other purpose (as federal highway user taxes have been diverted to “deficit reduction”).

5. Standards must be established to allow for the free flow of traffic from one road system to the next. The standards established by privately owned and operated railroads that permit the smooth transfer of freight cars from one corporation’s track to another’s demonstrate the market’s ability to handle this requirement.

Perhaps the key tool for promoting efficiency in a commercialized road system is the pricing of road access and use. Mr. Roth presents a comprehensive list of requirements that must be met if a road-pricing mechanism is to have an optimal impact on efficiency. Mr. Roth expects commercialization to result in a road system that is more efficient, more equitable, and safer. Given that the marketplace has usually produced better results than government has for all of these objectives, the probabilities are high that Mr. Roth is correct.

Even though we might have wished for a more radical solution (I myself have written a number of articles and papers advocating that public roads be sold to private operators), those wishing to be fully informed on the evolving issues of highway privatization can ill-afford to be ignorant of Mr. Roth’s work. This latest effort is a well argued and nicely detailed addition to his already impressive output on this issue.

  • John Semmens is a research fellow at the Independent Institute and research project manager in the Arizona Department of Transportation Research Center.