The Road to Ruin

Every good pragmatist knows that one of the absolutely essential functions of government is to own, operate, and maintain public roads. Several arguments I have heard advanced in favor of publicly-owned roads include:

  • Uniform standards;
  • Unrestricted access;
  • Cost-free access;
  • Universal access to an essential resource;
  • Safety;
  • Efficient allocation of scarce resources;
  • Availability of eminent domain power to efficiently locate major roadways;

And of course the vague but ever popular, “that’s what governments are for!” And every good economist knows that all of this is bunk. But is there something more nefarious in the institution of the public road?

Consider cable television. Or any other utility that requires long, narrow, contiguous strips of property. Cable television is convenient because it is an excellent, modern example of the practical end result of public road ownership, as we shall soon see.

Joe Capitalist decides to start a cable company. He will sell cable television service to his customers. To do so, he buys up land (or easements across land) to bury his cable and connect his satellite receiving station to the homes of his customers. Perhaps he charges installation by the cable foot from his station. This will be costly for distant customers, but inexpensive for nerby ones. In addition Joe Capitalist also charges a surcharge for each easement he has to obtain in order to connect a new customer. Again, distant customers will be priced out, but adjoining customers will enjoy a great discount, as no easements will be necessary. As Joe’s business grows, the number of customers who must pay easement surcharges will decrease. Joe might even want to sell to some distant customers below cost, because the property owners crossed by Joe’s cables will be encouraged to sign up, too. Once a line has been established in an area, neighbors are encouraged to buy from Joe, because buying from a similarly-structured competitor will require the payment of easement surcharges, whereas connections to Joe’s existing lines will be much cheaper. But if Joe’s prices get too high, or his service gets to crappy, then the extra cost to buy from a superior competitor is justified. Everything works.

If Joe wanted to, he could make a large capital investment and lay out cables all over town by dealing with whoever owns the roads. Cable requires long, narrow, contiguous strips of land, and roads are just that. There are three relevant road-ownership models to consider:

  1. Roads are owned by adjoining property owners, who may or may not license road maintenance and management out to a third party that does such things; such road maintenance entities would be businesses in themselves whose service coverage would coalesce by offering lower rates (and expending less in cost) for service to adjacent road-owners;
  2. Roads are owned by a third party, who operates a large percentage of roads in a geographic area which, for the same reasons as above, would likely be contiguous; or
  3. Roads are owned by the government.

Under the first scenario, Joe might sometimes find laying his cable out on the roads to be a good idea. If the roads are owned by adjoining property owners, then he can offer them the bonus of cheaper cable television in return for letting him bury his cable near or under their section of the road. But it could be spotty. If he runs into an intransigent property owner, he may have to divert across an existing customer’s land to find new customers. So a plan for laying out cable exclusively along the roadways might actually harms him in the long run. Roads are functionally one-dimensional: for any given point on the road where a cable could branch off, only two properties are adjoined. But whole parcels are frequently bordered by more than two neighbors. Even in rigorously designed communities, each parcel will ordinarily have three neighbors: one to each side and one to the rear. While Joe might make use of roads occasionally, they are not necessarily the most efficient way to lay out cable.

Under the second scenario, Joe might go to Sally’s RoadCo and strike a deal. Perhaps some sort of commission deal whereby Sally earns royalties on the customers Joe gets adjacent to Sally’s roads. He has this option, and it might work better, depending on how the roads are arranged with respect to the adjoining properties. If Joe is paying royalties and also paying the cost of burying lengths of cable, this kind of agreement with Sally would work best on high unit density streets – where there are more customers per unit of distance along the road. Condos, apartments, high-rise office space. Under this system, remaining competitive would be more challenging, because competitors would be able to make similar agreements with Sally, reducing the initial cost of entering the new market as compared with the previous road ownership model. Even if Sally likes Joe so much that she doesn’t give similar deals to Joe’s competitors (or, perhaps, offers him an exclusive agreement), it will be more difficult, but again not impossible, because Sally could still sell individual easements across the roads and competitors could fall back on the customer property approach, dealing with Sally only when they need to cross a road.

But in the third scenario, there is only one owner of the roads, and it is moved by the chad, not the dollar. Joe can no longer use the previous models for his business, because the government has surrounded small chunks of private property with public roads. Whereas under the private models Joe could negotiate with property owners, or with Sally, when he needed to cross a road, now he has to negotiate with the local government. Local government has interest in raising revenue, sure, but it does not need to worry about losing customers. So its services are crap and its prices stratospheric. Getting a right of way to cross a public road with his cable, either above it or below it, would be cost prohibitive if Joe wanted to expand his market beyond a few suburban blocks. He no longer has a rational road owner with whom to deal. Nor does he have an alternative road owner who might be more rational. What he does have, and where cable television shines as a perfect example of what I’m driving at, is the option of buying a municipal franchise.

With a franchise, Joe Capitalist pays 5-15% of his gross revenue earned from customers within the city. In exchange, Joe gets three things: 1) an exclusivity agreement, prohibiting any competitors from getting the same deal from the government; 2) the right to bury or suspend cable under, over, or along roads at no additional fee beyond what it costs him to install the cable; and 3) the promise from the local government that no competitors will be allowed to operate in his territory. As if they could under these conditions. The royalties are so high that the agreement wouldn’t be of any value to Joe without a guarantee of exclusivity.

These and similar agreements have been used ever since public utilities began to deregulate. Power, water, sewer, natural gas, telephone, the new fiber to the premises services (which some are arguing interfere with cable television franchises, because of Verizon’s intent to deliver TV over their FiOS product), &c. It is as if “deregulation” was just a cover for something entirely unlike deregulation.

But if Joe did not want to deal with the government, he could only sell cable television services (assuming no other obnoxious regulations) to people on his block. He cannot cross the road without dealing with the government.

This is different from the situation where Sally owns the roads, but doesn’t want to deal with Joe. Market forces affect Sally. They don’t affect the government.

By virtue of its ownership of roads, the government gains extraordinary control over the cable television market. It may determine who offers cable television services, where they are offered, and the price customers pay. If customers don’t like their cable company, they cannot choose another. Their only recourse is to alternative technologies. Like satellite, which doesn’t suffer from road-related oppression, but has its own special problems (read: FAA, FCC, and NASA). Suddenly, Joe Capitalist doesn’t have any incentive to offer quality service at low prices any more.

Cable TV is only an example. Roads let local governments control local markets by limiting the extent to which they can be operated without some interaction with the government. Roads let local governments control what private property owners may do on or with their property. I submit that, where roads are owned by governments, there is no such thing as private property, and no such thing as a free market. If I were a power-hungry local government, and wanted a subversive yet powerful means by which to throttle local markets and property owners, I would make sure I owned the roads.

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  • Comments (4)
  1. Thank you for your interesting analysis of the economics of roads and so-called “natural monopolies” such as a cable TV system. It has given me a lot of food for thought.

    I have professional experience in analyzing the electric utility industry, and am interested in how it would work in a truly laissez faire world. By that, I mean no legal monopolies and complete legal freedom of entry and exit. However, as you point out, the context for a free utility or cable industry, or any other industry whose infrastructure crosses roads, is that the roads must also be privately owned.

    Much is made by opponents of a laissez-faire utility industry of the allegation that it is only “efficient” to have one copper wire bringing electricity to homes and businesses, and therefore the utility should be a regulated monopoly. Such a leap of logic never made any sense to me. Even if the one-wire-only is efficient argument were valid, why does it follow that competitive entry should be legally banned? Why not allow freedom of entry and exit and see what happens?

    However, what is clear to me after reading your post is that freedom of entry and exit cannot be achieved when the roads are publicly owned because any utility competitor would still have to deal with the municipality. As you point out, such a negotiation almost always is a winner-take-all grant of a legal monopoly. So, it is impossible to contemplate a laissez faire electric utility industry without private ownership of roads. With privately owned roads, any potential electric utility competitor could incrementally compete by purchasing easements extending out from his power plant. He can build up his network incrementally. He can compete head-to-head with other utilities by being able to buy easements from many property owners, whereas if he is dealing with the city, he must deal with the monopoly owner of the roads.

    The larger issue behind this discussion is “deregulation.” Deregulation is such a poorly defined and understood concept that failed efforts to deregulate are unjustly giving capitalism a bad name. The arch example of this is the so-called “deregulation” of the electric utility industry. A small portion of that industry — construction of power plants — was partially liberated. At the same time, new price controls were imposed on retail prices, maximum wholesale prices were established in an arbitrary ex post facto manner, and the core legal utility monopoly of actually providing power to homes and business through local distribution systems was never touched. It remained a legal monopoly.

    The utility deregulationists tried to get around the legal local utility monopoly aspect by *forcing* utilities to buy power from other suppliers. Forcing a utility to be competitive through an arbitrary requirement that it buy from other companies or divest its power plants is no solution, and it has had a disastrous outcome.

    The utility industry can only be truly deregulated when its surrounding economic infrastructure, in particular roads, becomes privately owned. Of course, all industries are inter-connected, so the best deregulation experiment will not occur until laissez faire capitalism across the entire economy is established.

    We can still push for deregulation one industry at a time, but we have to be careful that the still-regulated or government-run parts of the economy, such as roads, do not pre-ordain that the so-called deregulation will be a failure.

    • Nate T.
    • September 12th, 2007 10:20pm

    Thank you for this post. You’ve given me a lot of helpful information to think about, not to mention to bring up to others if an argument about the viability of privatizing roads comes up. You’ve shown me that the private roads aren’t just a consequence of a fully free economy– it’s an important precondition!

    • Raman
    • September 19th, 2007 8:20pm

    Excellent article, thank you very much.

  2. I’ve linked to you, Qwertz.

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