WASHINGTON—The American Society of Civil Engineers (ASCE) gave America’s roads a grade of D on its 2017 infrastructure report card. In 2014, American drivers spent an average of 42 hours delayed in traffic. According to ASCE “More than two out of every five miles of America’s urban interstates are congested and traffic delays cost the country $160 billion in wasted time and fuel in 2014.” Rectifying this situation is worth many times the cost. For each dollar spent on road, highway, and bridge improvements, the Federal Highway Administration estimates that $5.20 in other costs would be reduced.
Yet there has been political disagreement in America for decades over how best to achieve such infrastructure improvements for congested roads. That debate is analyzed in a new paper posted by Resources for the Future (RFF), by RFF Visiting Fellow Stephen Salant, University of Maryland; and Nathan Seegert, University of Utah: Should Congestion Tolls Be Set by the Government or by the Private Sector? The Knight-Pigou Debate Revisited.
The divide on this issue, more times than not, has involved Republicans proposing to delegate to private firms the repair and expansion of existing roads and the construction of new roads financed by private tolls—while Democrats more often reflect sentiments like those of Senate Minority Leader Chuck Schumer, who recently observed: “You won’t build many roads and the ones you will [build] have such large tolls that the very middle class people that Donald Trump says he wants to help will be dramatically hurt.” Neither side considers how private tolls affect congestion.
In analyzing this issue, the coauthors draw on a famous debate from the 1920s in the economics literature. A.C. Pigou worked out what road tolls the government should set to minimize time and wages lost commuting. In response, Frank Knight argued that if a toll-setter was installed on one congestible road and motorists also had access to a second road that was slow but uncongestible, the private toll-setter would charge the same toll as Pigou had recommended the government charge. Hence, no need for government meddling. Like the previous literature, Salant and Seegert assume that motorists choose the least costly route to work, taking into account both tolls and foregone wages. But unlike that literature, they consider toll-setting oligopolies of any size and an uncongestible road of any speed.
Their conclusion: Except in the case of an especially fast uncongestible road, the welfare of motorists will be strictly higher if the government set Pigouvian tolls instead of leaving motorists at the mercy of private toll-setters. Even if the government set tolls high enough to generate more toll revenue than private tolls, motorists would still be better off because aggregate commute times would be sufficiently shorter.
In the unfortunate event that private toll-setting is adopted, Salant and Seegert propose that the government provide a “public option”—for example, a train traversing the same route. The availability of this alternative would implicitly regulate private toll-setting—lowering the full cost to motorists and raising their welfare.