People should pay their own way. It’s a maxim that many Americans hold near and dear. It grows out of our traditions of self-reliance and individual initiative. It’s such a strong belief, that it’s even seeped into the rules we apply to infrastructure projects.
By this logic, a road, bridge, airport, museum or subway should support itself through its user fees, fares or tolls. If it doesn’t, it’s a freeloader, like a welfare recipient having to be “subsidized” by the community at large.
While we may hold this to be a self-evident truth, there’s a problem: It doesn’t jibe with some basic rules of economics.
Back in the dark ages of the late 1970s, at Carnegie Mellon University in Pittsburgh, my professor in Economics 101 said the ideal price for crossing a bridge built at public expense was zero, provided it had capacity. Setting as low a price as possible means that more people will cross it, and thus the cost per person per crossing will be the lowest, compared to the cost of constructing and operating the bridge. A private company would maximize revenues, but government should maximize usage, he said. That way the public, who paid for the bridge, got the most for its money. This principle, he said, should be applied to all public goods.
The idea surprised me at the time, because usually economists preach the virtues of profit and the efficiencies of the private marketplace. Yet here was an expert saying “free” made sense, and was actually more efficient.
We’ve forgotten this, if we ever knew it. Evidence of this is everywhere. California, Texas, Virginia and other states are experimenting with having private companies build toll roads, with the high tolls paying for some of the capital or operating costs. The Federal Highway Administration, under President Obama, has asked that tolls be allowed on the Interstate Highway System, something prohibited on these “freeways” in the initial legislation. Commentators have argued that subways and other types of mass transit should pay their own way through higher fares. And in New York City, populist Mayor Bill de Blasio has rejected direct public funding for the popular but cash-poor public bike program, forcing it to raise the cost of its annual passes.
To the extent that any of these “fee-for-use” schemes are implemented, they will invariably reduce use and thus overall social and economic benefit. Yet this economic proof is barely ever discussed. This isn’t to say we should never charge a toll or a fare, particularly when there is more demand than supply. But we shouldn’t forget the principle: The price of public goods should be kept low in order to increase use.
This principle should be remembered as we witness (and one hopes, try to manage) significant changes in how we get around and how we pay for transportation. On the horizon are fleets of driverless cars and taxis, more public bike systems, and highways and automobiles with wireless transponders that allow direct congestion pricing on toll roads. A number of states have tinkered with the latter concept, as they watch revenues from gas taxes steadily shrink as a percentage of total road costs.
Brendan O’Flaherty, author of the textbook City Economics and an expert on transportation pricing, confirmed my decades-old memories. Using a bus, bridge or subway should be free if there is space or capacity. This isn’t about socialism, it’s about getting maximum use of public resources. The idea of a project paying for its capital and operating costs through direct user fees just leads to inefficient use. “For something that really is a public good, that is nonrivalrous and has no externalities, the price should be zero,” O’Flaherty says. “In general the price should be no higher than the marginal social cost of use, which is approximately nothing, except for pollution and wear and tear on the road.”
We can see this radical principle at work on the 6 million miles or so of our streets and highways. The vast majority -- I’d bet 99 percent -- we’re free to use, whenever we like, at no direct cost. A variety of taxes pay about 95 percent of the almost $200 billion spent annually to maintain our highway system. The gas tax, which is still just a tax, pays only about 40 percent of this. Meanwhile, tolls, which are true user fees, pay only about 5 percent of the cost of roads, according to national highway statistics.
When we move from the domain of transportation, we see the principle at work in an institution generally supported by the entire bandwidth of political opinion: public libraries. We don’t pay for libraries through check-out fees on books. Instead, we allow nearly unlimited use of all the books -- for free, paid for through general taxes. If we did require user fees to pay for libraries, the institution would shrink to a small room harboring a handful of dogeared bestsellers.
Can we remember this principle when it comes to roads and subways, museums, national parks and historical sites? Quality of life expands -- as well as economic growth -- when the price of public goods, particularly transportation, is kept low. When roads, buses, subways or public bikes are free -- or nearly so -- people will head for a new lunch spot or take the family to the park. And they usually do this “off-peak,” when capacity is the highest. We put a lot of money into public museums and national parks. Why not maximize their use?
None of this means that public institutions shouldn’t be run efficiently. It also doesn’t rule out agencies acting like capitalists in indirect ways, like developing land directly around stations or highways or operating a museum shop. But we shouldn’t forget there are public values, even in economics, which differ from those applied to private business.