“Who Will Build the Roads?” Part 2: How Private Roads Would Work

In Part 1 of this series I made a pretty compelling case for why roads should not be provided by the government. The only reason why one would continue to support government roads, despite the obvious problems, is a belief that roads cannot be provided efficiently through markets. Government roads, in this view, are the least bad alternative.

As I mentioned previously, you cannot convince the skeptics by simply pointing to markets and leaving it at that. The burden is on supporters of private roads to demonstrate how private roads could work in a free market and provide a positive proposal for road privatization. The proposal that follows shouldn’t be considered the way that private roads would work. Obviously, it’s impossible to know what innovations will be brought to market or what the various sectors of the economy will look decades from now. However, if I were made CEO of a road corporation and asked to create a consumer-friendly, efficient network of roads that doesn’t involve putting “a toll booth at every intersection”, this is how I would go about doing it.

Standardization In The Market

A common criticism of the free market offered up by people who have never thought things through is that it’s impossible for people to effectively coordinate their actions without some sort of central planning. The story goes that if people are just left free to do things their own way, everyone will do things differently producing inefficient outcomes. In our case, some roads companies might require people to drive on the right side of the road, while others require they drive on the left. The various road companies might employ radically different methods of payment collection making it extremely cumbersome to transition from one road to another.

This is a particular odd argument since it seems to be rebutted by rudimentary observations of real world markets. Credit card companies are able to coordinate with manufacturers of credit card readers in determining the size, shape, and technology used in credit cards. Computer manufacturers are able to coordinate with typing teachers to produce the standard QWERTY keyboard. Manufacturers of screws and screwdrivers are able to coordinate on the size and shape of the screw heads and screwdriver tips. You are only able to view this blog post because the developer of your web browser was able to coordinate with web developers on the use of HTML. Examples of this type of coordination and standardization in the market are endless. This shouldn’t come as a surprise either; it is in our self-interest to coordination our actions with each other. The market has a tendency to produce variety and differentiation when desirable and standardization when needed.

In some instances the coordination is spontaneous, in others it is the byproduct of a concerted effort of the various parties to get together and agree on standards. Examples of the later include, the World Wide Web Consortium which develops the Internet Protocol Suite or the International Organization for Standardization which has developed over 18,000 voluntary standards for everything from food safety to new technologies. Familiar to some readers of this is the blog are the Linux, Tor, and Bitcoin foundations which promote standardization within those decentralized open source software projects.

The Standardization Of Roads 

Our proposal for private roads begins with the creation of a Standards Development Organization. This may take the form of a consortium of road operators or trade association.  If we are privatizing the existing roads, we may want to roll the useful parts of the Department of Transportation (if there are any) into this new organization before dismantling the DOT.

The role of this consortium will be to promote standardization of both the rules of the road (drive on the right side, red means stop, etc.) and of the payment system. Since the consortium will be made up of road operators who are responsive to the demands of their customers, we would expect these standards to better reflect people’s preferences than current policy. And of course, since the adoption of standards is voluntary, road operators will still be free to experiment with new techniques that may improve customer experience.

Additionally, the consortium will be tasked with maintaining a database of road operators, real-time prices, and registered vehicles and drivers that will be needed for the payment system. Drivers will use a GPS system that connects to this database for the purpose of downloading prices and relaying billing information. Road operators will connect to the database to set their prices on a per mile basis. As I mentioned in Part 1, roads will employ congestion pricing meaning they will raise and lower prices with demand. For example, at noon a road may charge 10¢ per mile, during rush hour 50¢ per mile, and at night 2¢ per mile.

GPSThe consortium only needs to maintain the database and the public API. The actual GPS software used by the public will be provided by competing firms which we will refer to as billers. We might see Garmin and TomTom or even Google and Apple incorporate billing functionality into their GPS software. Drivers will register themselves and their vehicles with a biller and receive a monthly bill for their accumulated tolls. Billers will remit the payments to the road operators and keep a percentage for themselves as payment for their services. Over time we might expect all new vehicles to be manufactured with GPS/billing technology, but in the interim a simple cell phone app would suffice.

Obviously the use of GPS technology raises privacy concerns but in my opinion the privacy concerns tend to be overblown. The U.S. government is real threat to our privacy, not private business. The reason for this because private businesses are supported by voluntarily paying customers where the U.S. government is not. If Edward Snowden had disclosed a massive spying operation by Google, it would have gone bankrupt. Since the government acquires its funds through compulsion, it doesn’t have to worry about bankruptcy when it engages in massive rights violations. To the extent people are still worried about privacy, they could sign up with a biller that doesn’t store their location data. After all, your location is only needed for the purpose of billing. Once your bill has been calculated, the location data can be deleted.

Pricing Externalities

It really doesn’t make sense to charge each vehicle the same rate since different vehicles produce different amounts of externalities. For example, large trucks take up a lot more space, cause more wear and tear on the roads, and create more noise and air pollution than do small passenger vehicles. To charge both classes of vehicles the same rate would be to subsidize trucking at the expense of passenger vehicles. To compensate for this, all registered vehicles will be rated in a number of different categories and this rating will partially determine the driver’s per mile toll. The rating categories will be as follows:

  1. Size: Larger vehicles, especially trucks, will pay more since they take up more space on the road. At the other end of the spectrum, mopeds and scooters will pay the least.
  2. Weight: Heavier vehicles will pay more since they put more wear and tear on the roads causing them to need maintenance more frequently. Lighter vehicles will pay less.
  3. Pollution: Under any just legal system road operators will be limited in the how much pollution their roads can emit. The operators will in turn use pricing to regulate pollution and stay under their limit. Vehicles that pollute more, such as large trucks or buses, will have to pay more. Smaller vehicles that get better gas mileage will pay less. Electric vehicles or fuel cell vehicles won’t pay any extra. This alone would eliminate the need for CAFE standards.
  4. Noise: Like air pollution, noise pollution is a major concern especially for residential neighborhoods. Vehicles that produce lots of noise will pay more than those that produce less.
  5. Safety: Unsafe vehicles pose a risk to other drives. Vehicle owners that get their vehicle inspected or submit proof of routine maintenance will receive a discount. Vehicle owners who don’t submit proof will pay more.
  6. Oversize: Vehicles that are loaded beyond the design capacity, especially trucks that are hauling oversize loads, will pay more.
  7. Hazardous: Trucks that haul hazardous materials will also pay more to cover the risk.

All vehicles will receive a rating in each of these seven categories that will be used to determine how much over or under the baseline price they will pay. Road operators will be free to adjust the weighting of these categories for their roads. For example, an operator of a local road might want to increase the weighting applied to the size rating since large trucks will likely clog up the road. Highways may use lower weighting for size since they have more lanes.

In addition to a vehicle rating, drivers will be rated as well. Drivers that have a history of reckless driving or drunk driving, teenagers and the elderly, will receive a worse rating and will have to pay more to compensate for the risks they pose to others. The formula for calculating driver risk will be similar to the formula used by insurance companies.

Drivers will see the price per mile, factoring in their vehicle and driver ratings, displayed on the GPS screen and can plan their trips based on the cheapest or fastest route, whichever they prefer.

And one last point on insurance: whether or not drivers will be required to purchase liability insurance will be a business decision. If it adds values, road operators will undoubtedly make this a requirement.

Concerns About Monopoly

Had roads developed organically from within the market economy, without any intervention from the government, there would likely be little to no concern about monopoly. Consider a hypothetical example of how roads may have developed without government:

A number of people or developers move out to the countryside to homestead land and build houses. In such a scenario there are two ways that the local roads could develop:

  1. A housing developer builds the roads and turns their management over to a homeowner’s association. The maintenance is paid for out of voluntarily agreed upon association dues and everyone in the neighborhood is guaranteed access to the roads. Note this is exactly how many local roads are built and funded today. There’s no reason to expect it to be any different in genuine free market.
  2. Absent a developer, people would likely build houses in such a way that a pathway used for travel would develop between them. A road company could come by at a later date and pave the pathway, homesteading it in the process. As I mentioned in Part 1, under such circumstances the homeowners would rightfully maintain an easement allowing them to leave their property and traverse the (now paved) pathway. The road operator would remain free to charge outsiders or through traffic, but would not be able to charge the local residents.

Now under either circumstance, is there any concern that road operator would have monopoly power? I can’t see how there could be. The same could be said of almost all local roads. If there are monopoly problems associated with private roads, they certainly don’t arise from local roads.

Now as time passes, the neighborhood grows into a town and a clever entrepreneur recognizes a need to connect this town to another one five miles away. So the entrepreneur builds an arterial, a major thoroughfare connecting different towns, and charges residents to traverse his road. Seeing the profitability of this arterial, another businessman builds a second one. Soon enough a third businessman enters the market. Within the next couple years two highways are routed by this town and on and off ramps are built in the vicinity. As the town grows, residential and commercial developments are built up along the flanks of the arterials complete with their own local roads. This creates the opportunity to connect the local roads in these neighborhoods to create new arterials. By now there are at least a half dozen roads or more connecting this town to its neighbors. Now should we be worried about monopoly? Again, it’s hard to see why we should be.

The only way a problem might arise is if, after the area was fully developed, the companies running the arterials and highways merged. Now any new competitor has to acquire land that is already occupied or find a way to build above or tunnel underneath. Whether or not this happens will depend on the cost of the project versus expected profits in each individual circumstance. It’s not abundantly clear that mergers would take place or that this will result in monopoly. Add to that other modes of transportion such as trains, subways, waterways, air travel, the hyperloop, flying cars and it’s hard to imagine there would be a lack of competition.

Privatizing Government Roads

The problem for us, however, is that the existing roads did not develop organically. Rather they are the byproduct of centralized urban planning. Governments have been heavily involved in all aspects of road development from the beginning. As a result, we can’t guarantee that there are an adequate number of arterials and highways in all areas to provide sufficient competition. Monopoly thus becomes a genuine concern. There are several ways we can correct for this problem:

  1. The roads can be privatized in the manner I described above, but operated as a regulated public utility. This would eliminate concerns about monopoly, but would introduce a number of other problems. Public utilities typically suffer from problems of graft and corruption. New entrants are discouraged and the lack of competition causes inefficiency and a lack of innovation. All told, regulated public utilities are little better than government owned enterprises.
  2. Maybe the best alternative is to place restrictive covenants in the contract when auctioning off the roads. Using this approach we could guarantee right of access and promote competition possibly by limiting which roads, or the number of roads a single firm could own.
  3. A while back economist Bryan Caplan produced a unique proposal for altering the incentives of the road operator to guarantee it would charge a competitive price. Under this plan, drivers would be required to acquire a permit to drive on the road. There would be a limited number of permits which would be bought and sold on the market. Anyone who purchased more than one permit could rent it to others. The board of directors of the road company, as well as voting stockholders, would be required to own an equal amount of common stock and permits. If the road operator were to raise prices, the value of the common stock would rise, but the value of the permits would fall. A price increase would only produce a net gain to the road operator if it is Kaldor-Hicks efficient. In effect, it places both the benefit and burden of monopoly on the road operator. I find this plan very interesting though I’m not sure how it would work with multiple firms, if at all.

Road Construction Without Eminent Domain

Eminent DomainThe final refuge of advocates of government roads is to claim that road construction would not be possible with the use of eminent domain. The idea is that there will always be a holdout that prevents the project from taking place. Far from this being a bug, however, I view it as a feature of private roads. Exchanges are only mutually beneficial when voluntarily agreed upon by both parties. It’s hard to justify coercively taking someone’s property because you think building a road through it will create value for society.

One of the definitive papers written in the subject is The Mythology of Holdout as a Justification Eminent Domain and Public Provision of Roads by Bruce Benson. In short, there are a number of purchasing strategies a firm can employ to avoid the holdout problem (to the extent it exists). Even where it exists, there’s nothing saying a road can’t be built around, over top, or underneath the holdout. The image above is from China. They built a nice little roundabout around the property of a holdout. It’s funny to think that the “communist” Chinese have better protections for property rights than we do in “capitalist” America.

Conclusion

In this series I’ve made the best case I could against government provision of roads and have provided a very workable private alternative. The benefits of privatization would include an efficient allocation of resources, complete elimination of traffic jams, roads that actually treat us as customers and value our business, incentives to reduce or eliminate externalities, continual innovation and technological improvement, and enough investment to fix our crumbling infrastructure. Our daily commutes would actually become a pleasant experience. Next time someone says to you “but who will build the roads?”, be sure to set them straight.

2 thoughts on ““Who Will Build the Roads?” Part 2: How Private Roads Would Work

  1. Gas tax is 48c/gal on average, and a gallon gets a car about 20 miles, so this is 2.4cents/mile. Free market prices would probably be even less with more buses and more use of smaller vehicles to ease congestion.

  2. The best option for privatizing existing city roads, in my opinion, is to grant ownership of those roads to the property that exist next to the road. The property owner’s property lines would extend out to the middle of the road. At this point, there are multiple avenues (pun intended) the property owners can engage in to maintain road maintenance. However, the most likely to happen I believe is that each segment would be contracted with a road-maintenance organization that the property owner would pay to keep the road in good shape. Since there are cost savings in buying in bulk, maintenance organizations would offer discounts to entire neighborhoods to contract all their road segments to their company. Most businesses wouldn’t mind paying for this as a good road in front of their business is important for business (in fact, they likely would prefer this to the terribly maintained government roads). Of course, there will always be property owners who can’t afford the cost of the contract (or just refuse to pay for it). If it becomes a terrible enough nuisance, other property owners or a maintenance company could offer to purchase or lease the road portion of the property. With the advancements in GPS technology that you mentioned, a system may even be developed that allows the property owners to earn money each time someone drives over their portion of the road.

    At the very least, with all that said, the first step to privatizing city roads is segment them to the existing property owners and then… let the free market develop the best solution from there. This avoids any worry that a monopoly might purchase all the roads if the city tries to sell them as a whole.

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