The Trouble With Infrastructure Pricing

A blog about business and economics.
April 2 2012 4:26 PM

Infrastructure Pricing Shouldn't Maximize Profits

Brad Plumer's rundown of the promise and peril of infrastructure privatization is a must-read, but in terms of first-best optimal policy solutions it seems to me that this conversation begins and ends with the basic point that it's not in the public interest for access to infrastructure projects to be priced at a profit-maximizing level.

Imagine a city that owns, among other things, a bridge. Sometimes this bridge is very crowded. The smart thing for the city to do is to put a toll on the bridge and set the toll high enough to leave traffic uncongested. One benefit of that policy is that it drastically reduces the quantity of economic waste generated by people sitting in traffic. Another benefit of that policy is that the toll revenue allows the city to decrease taxes, which reduces the quantity of deadweight loss created by those taxes. So far so good. And in practical political terms, a privately owned bridge may well do a better job of remembering to set the price high at peak demand times than would a public agency. But suppose the bridge isn't crowded at nights or on weekends? Well here the optimal thing to do is to make the bridge toll-free. After all, the city has the damn thing and so people may as well use it. Among other things, making the bridge free at points when demand is low facilitates time-switching of trips so that people who want to avoid the toll during peak hours have every incentive to use the bridge some other time. A private bridge owner, by contrast, doesn't want to ever let the bridge be toll-free. He's not really interested in managing congestion efficiently or maximizing the overall social value of the bridge. If he's smart, he'll make the bridge cheaper at low-demand times than at high-demand ones but it's never profit maximizing to offer a free bridge.


Now in the real world, publicly owned transportation infrastructure is essentially never priced optimally as I outlined above. So it's very possible that in practice some jurisdictions are reaping some gains by moving to privatization. But in a structural sense, privatizing your bridges is a step toward locking bad pricing policies in permanently.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



The End of Pregnancy

And the inevitable rise of the artificial womb.

Doctor Tests Positive for Ebola in New York City

How a Company You’ve Never Heard of Took Control of the Entire Porn Industry

The Hot New Strategy for Desperate Democrats

Blame China for everything.

The Questions That Michael Brown’s Autopsies Can’t Answer


Kiev Used to Be an Easygoing Place

Now it’s descending into madness.


Don’t Just Sit There

How to be more productive during your commute.

There Has Never Been a Comic Book Character Like John Constantine

Which Came First, the Word Chicken or the Word Egg?

  News & Politics
The Slate Quiz
Oct. 24 2014 12:10 AM Play the Slate News Quiz With Jeopardy! superchampion Ken Jennings.
Oct. 23 2014 5:53 PM Amazon Investors Suddenly Bearish on Losing Money
Oct. 23 2014 5:08 PM Why Is an Obscure 1968 Documentary in the Opening Credits of Transparent?
  Double X
The XX Factor
Oct. 23 2014 11:33 AM Watch Little Princesses Curse for the Feminist Cause
  Slate Plus
Oct. 23 2014 11:28 AM Slate’s Working Podcast: Episode 2 Transcript Read what David Plotz asked Dr. Meri Kolbrener about her workday.
Brow Beat
Oct. 23 2014 6:55 PM A Goodfellas Actor Sued The Simpsons for Stealing His Likeness. Does He Have a Case?
Oct. 23 2014 11:47 PM Don’t Just Sit There How to be more productive during your commute.
  Health & Science
Oct. 23 2014 5:42 PM Seriously, Evolution: WTF? Why I love the most awkward, absurd, hacked-together species.
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.