We have explored the case for subsidy for transit and roads in previous weeks, discussing the pros and cons of capital and operating subsidy. Yet our discussion has largely focused on individual facilities or projects. In this post we work through how the physical structure of networks varies under public or private ownership regimes.
“Ubiquitous networks have positive returns to scale, in that the larger the network, the more valuable it is, as you can reach more destinations. Think of telephones (not very valuable if they are simply tin cans connecting you to a neighbor), transit (not very valuable if it only runs a single route), or airports (you won’t get very far if you only had direct connections, not hubs). The problem is that building ubiquitous networks requires large up-front capital expenditures and a base beyond existing users. For instance, while the Interstate Highway System was built by “user fees”, before the first mile of concrete opened, drivers (who obviously had not used the Interstate) were assessed federal motor fuel taxes on all miles traveled, not just Interstate miles. The class of drivers as a whole paid for the interstate as a whole, and ultimately benefitted as a whole. Any individual traveler may or may not have seen those benefits, or paid for them.”
