2008 January 23 Wednesday
Privatized Toll Roads Create Large External Costs

Yet another "privatize profits and socialize costs" story.

Privatizing toll roads in the U.S. may result in significant diversions of truck traffic from privatized toll roads to "free" roads, and may result in more crashes and increased costs associated with use of other roads, according to a new study.

Peter Swan of Penn State Harrisburg and Michael Belzer of Wayne State University will present the findings of their study, "Empirical Evidence of Toll Road Traffic Diversion and Implications for Highway Infrastructure Privatization" on Jan. 14 at the 87th annual meeting of the Transportation Research Board in Washington, D.C.

The study used data from the State of Ohio, the Federal Highway Administration, and the Ohio Turnpike to predict annual Turnpike truck vehicle miles traveled, and therefore diverted vehicle miles, based on National truck traffic and Turnpike rates. The researchers then compare estimated truck traffic diverted from the Turnpike to truck traffic on Ohio road segments on possible substitute routes.

Both economic models support the hypothesis that rate increases divert traffic from toll roads to "free" roads.

"While recently privatized roads do not have enough history to determine how high actual rates will rise, adequate data do exist to determine what happens when toll rates increase dramatically on state-run toll roads," says co-author Peter Swan, Assistant Professor of Logistics and Operations Management at Penn State's Harrisburg campus.

The study concludes that if governments allow private toll road operators to maximize profits, higher tolls will divert trucks to local roads, depending on the suitability of substitute roads. The authors estimate that for 2005, a for-profit, private operator of the Ohio Turnpike could have raised tolls to roughly three times what they were under the public turnpike authority, resulting in about a 40% diversion of trucks from the Ohio Turnpike to other roads.

"The Ohio Turnpike substantially increased tolls during the 1990s to help finance construction of a third lane in each direction over substantial portions of the Turnpike," the researchers say. "Because the Ohio Turnpike raised its rates for trucks in the 1990s and later lowered them again, sufficient data exist to calculate a demand curve for the Turnpike based on demand and the toll rate. We then use the resulting demand curve to estimate diversion of trucks caused by the changes in the toll rates and to forecast how toll rates might affect Turnpike truck revenue."

The number of diverted trucks is important to both the State of Ohio and the Nation for economic and social reasons.

First, many of the substitute roads are two-lane highways with crash rates many times that of the Turnpike. Second, the increased traffic has reduced the quality of life for communities located along diversion routes and dramatically increased the maintenance costs of many of these roads, say the researchers.

Finally, higher truck tolls have two negative effects on the economy. Motor carriers eventually pass all tolls to consumers in the form of higher prices for goods. While higher toll rates may not decrease the efficiency of non-diverted trucks, they have raised costs.

Furthermore, diversion reduces the efficiency of these trucks because they clearly are taking a second-best route. The resulting loss of efficiency can stifle economic activity, according to the study.

Many of these economic and social costs may not be considered in future leases or sales, especially when such costs are paid by people in states other than the one making the lease agreement.

The study researchers question whether it makes good policy sense to substitute the existing fuel tax-based system of funding road infrastructure with a system that uses widespread tolls and to grant long-term leases to private enterprises that will operate them for profit.

External costs are inconvenient for advocates of extreme laissez faire economics because such costs argue against a purely private market. In this case a publically owned toll road might minimize total costs. But that keeps the state involved in operating highways and therefore reduces the extent of privatization. Hence the desire to ignore inconvenient external costs.

Share |      By Randall Parker at 2008 January 23 08:32 PM  Economics Transportation

Bob said at January 24, 2008 12:02 PM:

The article about the toll road study is incorrect in one aspect, which is that all higher toll prices get passed on to consumers. Not so. Basic economics tells us that unless demand for trucking services is perfectly inelastic (and it certainly isn't), the truckers will only be able to pass on part of the higher tolls. The same applies to higher gas taxes.

This is why the trucking lobby opposes measures that increase its costs like higher tolls and gas taxes. Such lobbying would be irrational if all costs increases could be passed on to consumers. But they can't.

This is the stuff of microeconomics 101, but most journalists covering business and government don't seem to have taken this class.

Dave Gore said at January 24, 2008 4:55 PM:

In Ohio, they raised rates on existing turnpikes. They didn't build new roads. The option of adding private toll roads is the option of increasing the number of roads available, which can only reduce accidents.

RKU said at January 24, 2008 7:26 PM:

Actually, there's a far worse (and hilarious) additional potential problem.

One of the earliest big toll toads was built in Orange County a couple of decades ago, as a shining model of Glorious Free-Marketism. But afterwards, the toll road owners apparently used their lobbying (i.e. bribery) efforts to prevent any other roads from being built anywhere in the region and even managed to block reasonable maintenance of the existing "rival" roads. This acted to maximize the congestion and hence the profits on their own toll road. There was a big newspaper expose on the scandal about a decade ago. Very, very amusing.

Mirco said at February 1, 2008 5:52 AM:

I don't see where the private toll roads externalize the costs when they raise the tolls.
Telling the higher tolls push people out of the private road is not a real externalization.
The solution is liberalizing the market and letting whoever want to build a toll roads to do so (if they have the land to do so).

Clayton said at February 1, 2008 3:54 PM:

I am familiar with the toll road in The OC. Not only is it under used, but it has been taken over by the gov't since it bankrupted the company that opened it. I used to (when I lived out there) go on long bike rides through the canyon and up the coast, that road was a deadzone. it was so under used.

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