Privatising the roads? - why roads are not a public good

At the special Manifesto Conference on Saturday, I muttered to a colleague that rather than continue with the congestion charge, we might be better off simply privatising the roads. While this was meant to be deliberately controversial, his response was quite surprising. “They are a public good” he replied, to which I responded “No they’re not.” It being a whispered conversation in the margins of a meeting, it could only continue along the lines of “Yes they are”/”No they’re not” until there was a real danger that the audience were going start joining in or we were going to be joined on stage by a pantomime dame.

Not being one to let things drop, however, I find myself needing to explain why roads are not a public good, both because it highlights errors about transport policy and because it highlights misunderstandings about other public goods.

Before we look at what a public good is, we need first to dispel one myth and so clear up what a public good is not. Public goods are not merely goods from which we all benefit. After all, as Adam Smith made clear, we all benefit from the activities of a baker (he provides us with bread thus obviating the need for us to learn to bake, build an oven etc.), but baking is not a public good. In the same vein, just because the economic activity that roads facilitate benefits us all does not make them public goods. Neither does the fact that they are free at the point of use make them a public good, for this would be to put the cart before the horse; just because things are provided in the manner of a public good does not mean that this is the right or best means of doing so.

The Economist defines a Public good as one which is available to all or to none: they are non-rival, non-excludable and not-rejectable. Dr. Paul M. Johnson adds that they “cannot practically be withheld from one individual consumer without withholding them from all … and … the marginal cost of an additional person consuming them, once they have been produced, is zero”.

Tellingly, none of these applies to roads. Indeed, the first highlights the key problem facing road-users today: roads are extremely rivalrous. There is a very limited amount of space, and so use by any one individual is at the expense of others (expressed through traffic congestion and so loss of both time and temper). This is of course the logic behind the congestion charge.

Roads are also excludable, though in practice this option is not often exercised. Users of the M6 will be well aware that it is possible to exclude drivers from sections of the road dependent upon whether they pay a fee. The template for road privatisation is the service provided by Dulwich College: in 1789 John Morgan built a road from the top of the hill to fields he rented from Dulwich College, charging a toll on people who passed through his land, and on their animals.

Roads are also rejectable, in that one does not have to drive. One may walk or take trains; I know of many environmentally-minded people who have chosen to forgo the car, as well as urban residents that cannot face the horrors of road travel. Yet they are still taxed to pay for a commodity that they do not use.

Dr. Johnson’s points are actually covered by the above: tolls do enable one to withhold the service from some but not others, while congestion means that the marginal cost of an additional road-user is not zero; it is merely defrayed across other road-users by increasing their journey times and frustration, as well as on the general citizenry through pollution and eventually demands for extra roads. And so the cycle continues.

Nonetheless, the arguments that Adam Smith and others used to justify the funding of public goods through taxation are often applied to roads. This is most easily described as the “free rider problem”: to wit, everybody benefits from the building of roads yet without taxation individuals cannot be forced to pay. This is patently not true: not every taxpayer benefits from the building of a road from Henley to Oxford, and through the use of tolls free-riders can be excluded.

In fact, the arguments for funding even some classic public goods are flawed. Adam Smith himself used the example of the lighthouse, arguing that because all shipping would benefit from being warned of the reefs but no private lighthouse keeper could exclude those who did not pay from receiving the warning, nor force them to pay a toll, those who built lighthouses would bear all the costs individually while the benefits would be spread broadly. Yet this does not mean that no private interest will build a lighthouse. One or two shipping magnates may decide that their own losses from shipwrecks are so great that they would personally benefit to such a degree from the building of a lighthouse that they are willing to bear all the costs even though others might benefit. This logic was applied by the Roman and British empires which, in suppressing piracy, gained so much from facilitating trade that they did not mind the fact that others benefited from safer seas without contributing. Similarly, rich burghers who wish to live in beautiful cities may choose to build great public works at their own expense. Thus, depending on one’s viewpoint, there is either a fine line between enlightened self-interest and philanthropy, or Smith’s “Invisible Hand” was a better guide to individual action than even he realised.

This might apply equally to roads, for two reasons. Firstly, because the benefits of road-use are not equal, those who benefit most may wish to build roads from which others may benefit. An example from Hong Kong is instructive: when business leaders approached Sir John Cowperthwaite, Financial Secretary, to argue that the government should build a bridge linking Hong Kong island to Kowloon Bay on the grounds that it would boost business in the colony by billions of pounds, he responded that if it was so valuable to them then they should build it themselves. After a long and hopeless battle they eventually did, to their own and everybody else’s benefit. Similarly, one might expect freight hauliers and other big businesses to pay for improved roads so as to reduce the costs of transporting goods.

The real value from infrastructure, however, lies in the boost they give land values. A (less happy) story from London is equally instructive: when Canary Wharf was being built, the developers offered to spend £300 million to build a brand new railway line linking Waterloo and London Bridge to the Isle of Dogs and then gift it to the nation, because they knew that by making it easier for commuters to reach their offices, the rental values of those offices (which they were building) would be raised by billions of pounds. Instead, a combination of rent-seeking by Members of Parliament (who wanted stations in their constituencies) and bureaucratic protectionism (as London Transport sought to protect its monopoly on the building and managing of tubes in the capital) led the Conservative government to look this gift horse in the mouth and instead build the Jubilee Line extension entirely at the expense of taxpayers, many of whom have never used it but have paid vast sums to help wealthy bankers to get to work more easily.

Thus roads, like railways, are best funded not through general taxation but through a combination of land-values and user pricing. This could be achieved in either of two ways: one would be to levy a general land value tax to pay for infrastructure, and to introduce road-user pricing to pay for upkeep and to control congestion; this would maintain the government’s road monopoly (which those who distrust private markets might prefer). Alternatively, we might allow private investors to build and maintain roads, which they would do in the hope of gaining profits from the land they own, the charges they levy and the reduction in costs of other business activities.

I actually remain quite agnostic about these two choices (though as Tristan Mills has pointed out, the latter avoids the increasingly apparent problem that Government cannot be trusted with the vast amount of information that nationwide road-user charging would generate about individuals private movement). What is clear is that the current habit of treating roads as though they are a public good that must be funded from general taxation is not only theoretically incorrect but also leads to a “tragedy of the commons” expressed through congestion and pollution, causes roads to be built where political forces rather than demand dictate, and raises levels of economically-damaging taxation. Whether the shift is from state to private or merely from taxing the general public to making the beneficiaries pay, it is time to start treating roads as a very private good.