Road Essay Research Paper A Practical Proposal

Road Essay, Research Paper

A Practical Proposal for Privatizing the HighwaysLet us suppose that our national highway system is a”natural monopoly,” as economists use the phrase. Howcould it be privatized. In particular, how could it beprivatized in a way which would:(a) create private enterprises’ usual incentives to keepprices and costs low and quality high(b) create incentives for innovation(c) keep the low transactions costs of free public provision(d) eliminate any need for continued regulation typical of”contracting-out” schemes(e) be simple enough to win public support.2. An Overly Simple ProposalThe simplest answer would be to simply give every adultcitizen in the country a share of stock in the road system,and then let the Privatized Road Corporation do whatever itlikes. It could charge a flat fee, per-mile charges, tolls, orany other combination. Naturally, the Corporation wouldearn massive monopoly profits, but if everyone in thecountry were receiving a share of them, why should wecare. In fact, if we push the logic far enough, we will notethat if the consumers and the stockholders are the samepeople, then trying to extract monopoly profits would becompletely futile. But on second thought, we should note the strongassumption underlying this idea: it assumes that everyone inthe country would use the roads to the same extent, and thateveryone in the country would hold an equal number ofshares. The latter condition would _initially_ hold byassumption; but in all likelihood, some people would selltheir shares to others, and the largest shareholders would,as usual, hold the positions of power in the corporation. Similarly, executives would probably receive much of theircompensation in stock benefits. The result would be thatthe people making the pricing and other decisions of thePrivatized Road Corporation would make a great deal moremoney from higher stock earnings than they would lose frompaying high road prices. Indeed, this is the typical corporatesituation in any industry: because an oil executive buys onlya small amount of oil, but receives much of his pay in stockoptions, the fact that he is one of the consumers who willpay high prices is trivial for him. Of course, if the Privatized Road Corporation will be able toearn massive monopoly profits, this will be reflected in thestock price; if everyone in the country starts with a share,the real recipients of the monopoly profits would be all of us. The distributional issue would be irrelevent. But what_would_ matter would be the so-called “deadweight loss ofmonopoly.” If a road firm charges $5000 a year to drive onits roads, but the marginal cost of another driver is only$1000, then consumers who were willing to pay $5000merely _transfer_ some wealth to the road firm; but all of thebenefit of consumers willing to be $4999 to $1000 isneedlessly lost. A system of equal initial distribution ofshares renders the transfer from consumer to road companycompletely neutral; but it does nothing to negate deadweightlosses. Admittedly, some pricing regimes (known as multi-parttariffs) can theoretically eliminate deadweight loss. Onecommon sort of multi-part tariff is to charge a high flat per-person fee and a low per-unit fee. If a convenient multi-parttariff existed, then the simple proposal to distribute sharesand let the Privatized Road Corporation do as it pleaseswould be sound. But normally it is difficult to implement afully efficient multi-part tariff system; in particular, doing somight involve very high transactions costs which wouldthemselves constitute a deadweight loss. Let us then see how this first proposal measures up by thestandards we set at the outset:a. The competitive checks on pricing are extremely weak. While monopoly profits would be shared equally beeveryone, the deadweight losses of monopoly pricing wouldbe captured by no one. There would, at least, be a normalincentive to maintain quality and keep costs down which isnotably absent in state monopolies. b. The incentives for innovation would be distinctivelyimproved. What incentive does a state monopoly have toimprove its product or lower costs. In contrast, a privatemonopoly has every incentive to exploit all possible costsavings and to introduce new and improved products. Itmay charge an arm and a leg for them, but it will certainlywant to introduce them. c. It definitely seems like a private road system could havevery high transactions cost. In a best-case scenario, itwould just charge a (high) flat fee; this would be a definiteimprovement over the current morass of registration fees,gasoline taxes, tire taxes, and tolls used to pay for theexisting highway system. In a second-best scenario, the monopoly privatized firmwould charge per-use fees, but would at least have anincentive to adopt new, cheap technology for collecting itstolls (for example, a device similar to the supermarket pricescanner). Government monopolies can’t directly reap thegains of cheaper toll-collecting technology; in fact, adoptingsuch technology could seriously impede the _political_profits of existing toll collection services, especially thesinecures that toll-collection agencies can bestow onpowerful public-sector unions and their members. In a worst-case scenario, however, the Privatized RoadCorporation would put all of its energies into extractingevery dime of surplus possible. They might spend$1,000,000 on new detection technology in order toincrease profits by $1,000,001. In essence