On the Inefficiency of Privatized Toll Roads

Via Mark Thoma comes a discussion of a negative externality from the privatization of toll roads provided by Steve Hevner:

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.

But why would trucks change their driving habits as a result of privatization? Steve continues:

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.

Supporters of privatization typically argue that the price that the government receives more than makes up for the present value of lost toll roads. But notice something about these present value calculations – they assume the lower toll rate, while the private company’s bid is based on the ability to increase the toll rates. In other words, there is a transfer of wealth away from drivers. Add to this the inefficiency effects from monopoly style toll rates and the effect that Steve mentions – and we get as very different cost-benefit calculation than the ones we often see from the supporters of privatization.