Donald J. Boudreaux | Pricing roads

Virginia’s roads are congested. And our leaders are tackling the problem – or claiming to do so. Trouble is, too many of the proposals ricocheting around Richmond are small-think. Many politicians think the problem has to be too little money, so they keep demanding higher taxes that, we are assured, the state will use efficiently and wisely to “solve” our transportation needs.

The more fiscally responsible resist these calls, knowing that taxes too-often dampen economic growth and too-seldom deliver the public goods their proponents promised. However, because road congestion is an increasingly annoying reality, politicians promoting the simple-to-grasp “solution” of building more roads with higher taxes will typically win the day and more roads will be built. Even if congestion is eased, though, the inevitable inefficiencies and petty corruptions of politics will ensure that this relief comes at an excessively high price.

Persons who truly care about improving Virginians’ quality of life over the long-run must think bigger.

One of those ways was articulated well by U.S. Transportation Secretary Mary Peters in the Richmond Times-Dispatch last summer. She made a compelling case for using “new open road tolling technologies where prices vary throughout the day.” Secretary Peters correctly understood that “as traffic levels change, so too would the nominal amount drivers are charged. These varying tolls would ensure that car and bus traffic keeps flowing, even during the busiest times of the day.”

The idea is to charge more for a resource the higher the demand is for that resource relative to its supply. Because road-surface area is in higher demand at 5 p.m. on Wednesdays than at 5 a.m. on Sundays, the value that people place on using roads on Wednesday afternoons is greater than it is on Sunday mornings. Put differently, the same physical road provides more valuable services on Wednesday afternoons than it does on Sunday mornings. Economically, roads are different resources at different times. And just as it makes sense to charge more for, say, a pair of leather pumps than for a pair of flip-flops (even though both provide basic foot-protection services), it makes sense to charge more for roads during rush hours than during other times.

Importantly, roads should, as much as possible, be privatized so that pricing and road maintenance will be done by private firms. Unlike government bureaucracies often pulled to serve political goals at odds with their ostensible missions, private firms have one ultimate goal: earn maximum profits. Pursuit of this goal leads firms to charge those prices that (as economists inelegantly say) maximize consumer well-being. Prices too high will result in inefficiently low use of roads and, hence, profits lower than possible. Prices too low will result in an inefficient overuse of roads with the resulting traffic congestion and profits lower than possible.

Just as Starbucks has powerful incentives to charge prices that bring the optimal number of customers through its doors, private road operators have incentives to charge prices that allocate traffic optimally across their roads in both space and time.

Critics of private roads are quick to assert that, unlike owners of most other private enterprises, road owners would face too little of the competition necessary to oblige them to charge “correct” prices. This concern is understandable. While it’s easy to shift your patronage from Starbucks to Caribou Coffee if Starbucks raises its prices, it’s much harder to shift your patronage to other superhighways if the one closest to you charges excessively high prices. The reason, of course, is that superhighways take up enormous amounts of land area and, so, there aren’t many of them. Those that do exist are miles apart from each other. This fact limits competition.

This problem is surmountable. Government could lease to private bidders the rights to operate and maintain – and to charge for the use of – roads. Part of the requirements of the bidding could be that the competing bidders specify the prices they would charge for use of the roads (such as “$1..50 per mile during the hours of 5 p.m. and 7 p.m., and $0.10 per mile during the hours of 2 a.m. and 4 a.m.”). Bidders specifying lower prices would be more likely to win bids than bidders specifying higher prices.

Because at the bidding stage no bidder would have monopoly power over any road, each bidder would have incentives to specify prices high enough to enable it to cover its costs, but not so high as to risk being outbid by competing bidders. In this way, competition can be harnessed to ensure competitive pricing for road use.

Virginians would finally enjoy less-congested roads without suffering arbitrary fixes such as HOV lanes and paying the inordinately high prices entailed by tax hikes.

 

Donald J. Boudreaux is professor of economics at George Mason University and senior fellow for economic policy and tax reform at the Virginia Institute for Public Policy.


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