Thursday, May 9, 2019

Public Goods, Private Roads, and the Case of Scandinavia

In We Can Build the Roads, and Other Things Too Mike Munger argues that roads are not public goods and that the examples of Sweden and Finland support this argument. I think there are a few problems with this argument.

One problem arises from the way we tend to explain public goods in economics. We tell students that they are non-rival and non-excludable. Rival means that one person’s use of a good diminishes the benefit for other users: if you drink my coffee that will diminish the benefit that I get from it. Excludable means that it is possible to exclude other people from using a good at a reasonable cost. In fact, I generally do not have any problem keeping people for drinking my coffee. The most common example of a public good is national defense. The benefit you get from us not being invaded by North Korea does not diminish the benefit I get from it, and it would be very difficult to exclude either of us from those benefits. The problem with public goods is that because people can get the benefit without paying, they will tend to free ride, and the good will be underprovided. Munger points out that that roads are often rival and people can be excluded. Interstate 95, which runs through Fredericksburg, is a good example. Heavy traffic makes it rival more often than not, and we have new toll lanes that you have to pay to use.

Munger notes that what most people think of as public goods, things like roads and public education, are not “pure public goods.” But it is not unreasonable for people to think of many of these things as “public goods,” in the sense of things that the state may have a role in providing, even if they are not “pure” public goods. Rivalry and excludability are matters of degree, and to the extent that something has the characteristics of non-rivalry and non-excludability positive externalities tend to exist. While I may be able to exclude you from direct access to the good, I can’t completely prevent you from getting some of the benefits. When the fire department puts out the fire in my house, you are better off because it won’t spread to yours. Yes, I can exclude people from a school and after a point it becomes rival, but if someone does get an education, I can’t exclude other people from benefiting from that as well. I can exclude people from getting flu shots, but I can’t exclude them from the benefits of others getting the shot. What people tend to think of as public goods are goods that many people believe to have significant positive externalities. Standard economic theory tells us that the market equilibrium will tend to underprovide goods with positive externalities, and that government action (or possibly some other sort of cooperative action) might be able to move society to a point where the marginal benefit to society and the marginal cost to society are closer to being equated. Just because you can have a private road, or a private school, or private security does not prove that there are not benefits to public provision of education, and roads, and police.

Not only are rivalry and excludability matters of degree, they are not necessarily the same in all situations. A road is a piece of land that can be used by some sort of traffic. Merely being a road does not make something inherently public or private. The question “Are roads public goods?’ doesn’t really make sense.  If I owned a ranch in Wyoming and built a road on that ranch, nothing about that road would make it a public good. Similarly, if I build a road in a new housing development that only connects to one public road way there are unlikely to be benefits to people who do not live there and excluding people is unlikely to be an issue. On the other hand, the street that I live on in downtown Fredericksburg is non-rival most of the time and it is hard to imagine any scheme for excluding people that would be worth the cost. Personally, I am perfectly happy paying my taxes and not having to participate in its management.

The broader point about economics here is that we shouldn’t think of economic models as a bunch of bins to sort things into: “This goes into public goods. That goes in common property.” Or “This market goes in perfect competition; that one goes in monopoly.” Instead, the models help us to understand the influence of things like rivalry, excludability, product differentiation, and barriers to entry. All of which are matters of degree, not simply yes or no.

What about the examples of Sweden and Finland? Munger suggests that they support his argument that roads are not public goods:

A recent report from the Devoe L. Moore Center gives this description:
Two-thirds of roads in Sweden are privately operated and managed by local Private Road Associations (PRAs). These road associations are composed of homeowners who live along private roads. An estimated 140,000 kilometers (about 87,000 miles) of roads are the responsibility of 60,000 PRAs…. The costs of upkeep are divided among members of the association. PRAs that do not accept government subsidies can prohibit traffic at their discretion. Those that receive subsidies must allow all vehicles to travel on their roads.
Private ownership by PRAs has proven to be a cost-effective measure for operating roads according to the the Swedish government. In 2001, a government-commissioned evaluation found PRAs could run their roads at about half the cost as for the national.

Finland employs a similar system. Many private roads are managed by local cooperatives. Finland has 78,000 kilometers (about 48,500 miles) of public roads and 280,000 kilometers (about 174,000 miles) of private roads. Of the 5 million people who live in Finland, around 700,000 of them reside near a private road. Like Swedish PRAs, Finnish cooperatives are made up of homeowners who live proximate to private roads. These homeowners collectively maintain their local roads and are eligible to receive subsidies from the federal government to cover a portion of their expenses.
There are two lessons here, and both are important.
First, many of the things we expect from the state are not public goods. They could be more efficiently and effectively handled by other kinds of cooperation.

Second, roads in particular are emphatically not public goods, and many other nations have solved the problems of road use and financing by decentralizing provision and control. For some reason, the U.S. has allowed itself to become a socialized road system, with no sense of any local ability to improve roads, fix potholes, or cooperate with your neighbors. With available technology, and with the even better technology now being developed, roads can be operated locally and voluntarily. And that’s actually true for many activities we now simply assume are restricted to the state. Some creative rethinking can put us on the road to a better tomorrow.

This description makes the private roads in Sweden and Finland sound very important, and it seems to imply that we don’t have private roads in the United States.
Private roads in Sweden and Finland account for a lot of miles but very little traffic. This is from a paper by Sven Ivarsson, vice chairman of the Board of the National Federation for Private Road Associations in Sweden, and Christina Malmberg Calvo, the World Bank.
“The Swedish road network measures 419,000 kilometers (see Table 1). The Swedish National Road Administration (SNRA) manages one quarter of the network (98,000 kilometers), and the municipalities 10 percent (38,000 kilometers). The remaining two thirds (283,000 kilometers) are privately owned and managed roads. The SNRA roads carry 70 percent of the traffic, the municipal roads 26 percent of the traffic, and the private roads the remaining 4 percent of the traffic. While the private roads arguably constitute a low volume network, some serve vacation home areas and about 50 percent are forest roads mainly opened for commercial purposes, about one third of the private roads carry more than 100 vehicles per day, including some up to a 1,000 vehicles per day throughout the year. This paper focuses principally on the 50 percent of the private road network which is owned and managed by communities, half of which receive state subsidies.”

The situation is similar in Finland. In the 1990s,
“Finland has a surface area of 338 000 km2 and 5 million inhabitants. The road system includes 105 000 km of private roads in residential areas, 77 000 km of public roads maintained by the Finnish National Road Administration (FinnRA), and 23 000 km of city streets and municipal roads maintained by local authorities. Traffic volume on private roads is approximately 1000 million km per year, which is 2.5 percent of the total traffic volume in Finland.” Tiina Korte Also like Sweden many of the roads are through forests, and about 70% of lumber starts on private roads.

Private roads carry 4% of traffic in Sweden and 2.5% in Finland. I don’t know what percentage private roads carry in the United States. That’s right, there are private roads in the United States. As a matter of fact, there have pretty much always been private roads in the United States. Private roads were very important in early America. A lot of research has been done on such roads by people like John Majewski, Dan Klein and Daniel Bogart (see here for instance). There are still many private roads.  If you have spent any time in rural areas, you have probably come across signs on roads that say “Private Property. No Trespassing.” Private roads run to some rural homes, and across private forests, farms and ranches. Here is a template for a private road agreement provided by Orange County, VA.  The agreement provides for a group of people to privately provide for a road.
Points 4 through 7 are interesting
(4)   No public responsibility. Said construction and maintenance is under no circumstances a responsibility of the County, Virginia Department of Transportation (VDOT), the Commonwealth Transportation Board, or any other public entity.
(5)   Emergency services. It is understood that failure of the owners to adequately maintain the Roadway may inhibit the ability of the County to provide emergency services to the parcels, any liability for which shall be borne among the owners.
(6)   School bus service. The provision of Orange County public school bus services on this private road are not guaranteed or implied.  The suitability for any private road for school bus services and routes shall remain at the discretion of the Orange County School Board.
(7)   Liability. It is understood that the County and its agents shall not be liable or responsible in any manner to the developer or the property owners along the road, or to their contractors, subcontractors, agents, or any other person, firm or corporation, for any debt, claim, demand, damages, action or causes of action of any kind or character arising out of or by reason of the activities or improvements being required herein.  It shall not be eligible for acceptance into the State Secondary System of State Highways for maintenance until such time as it is constructed and otherwise complies with all requirements of the Virginia Department of Transportation for the addition of subdivision roads current at the time of such request.  Any costs required to cause this road to become eligible for addition to the State system shall be provided from funds other than those administered by the Virginia Department of Transportation and by Orange County.

The difference between the Scandinavian examples and the U.S example is that Orange County is telling people who want a private road not to expect anything from the government. People in Sweden and Finland, on the other hand, appear to believe that there are positive externalities associated with maintaining the population even in remote parts of the country, and, therefore, subsidize low volume private roads in those parts of the country.

Monday, May 6, 2019

More Evo-Nonsense

Occasionally, Evonomics provides something useful. For instance, it re-ran the blog post “Where do pro-Social institutions Come From? How Do Countries ‘Get to Denmark’? by Pseudoerasmus

Unfortunately, much of the time it runs critiques of “economics” by people who do not know anything about economics.

Here for example is Nick Hanauer writing about “How to Kill Neoliberalism Kill “Homo Economicus”:

I believe that these corrosive moral claims derive from a fundamentally flawed understanding of how market capitalism works, grounded in the dubious assumption that human beings are “homo economicus”:  perfectly selfish, perfectly rational, and relentlessly self-maximizing. It is this behavioral model upon which all the other models of orthodox economics are built. And it is nonsense.

The last 40 years of research across multiple scientific disciplines has proven, with certainty, that homo economicus does not exist. Outside of economic models, this is simply not how real humans behave. Rather, Homo sapiens have evolved to be other-regarding, reciprocal, heuristic, and intuitive moral creatures. We can be selfish, yes—even cruel. But it is our highly evolved prosocial nature—our innate facility for cooperation, not competition—that has enabled our species to dominate the planet, and to build such an extraordinary—and extraordinarily complex—quality of life. Pro-sociality is our economic super power.

What is nonsense is that economic theory is built on the assumption that human beings are “perfectly selfish, perfectly rational, and relentlessly self-maximizing.”

Here is Gary Becker on the meaning of rationality

“What is meant by rational behavior? Consider first what is not meant. Certainly not that people are necessarily selfish, “economic men” solely concerned with their own well-being. This would rule out charity and love for children, spouses relatives or anyone else, and a model of rational behavior could not be so grossly inconsistent with actual behavior and still be useful.”

“The essence of the model of rational behavior is contained in just two assumptions: each consumer has an ordered set of preferences, and he choses the most preferred position available to him.” (Becker Economic Theory page 26)

Show me where the sort of description of rationality that Hanauer puts forward appears in economics. I looked in my old copies of Varian and Silberberg. It wasn’t there.  Checked Mankiw’s principles text. Not there either. You can find assumptions about the consistency of preferences, but where do you find anything about what people are supposed to prefer? There is no more reason for economists to say that people can’t get utility from charity than there is for economists to say that you can’t get utility from eating apples.  

If we want to improve economics we need to start from where it actually is, not with some imagined boogeyman of homo economicus.

There are plenty of things we could do better. We could teach more history. We could place less emphasis on advanced math. We could try to get faculty and students that look more like the society we live in. But you aren’t going improve economics by assuming an imaginary homo economicus who isn’t there.