On Privatization Nostalgia

Christopher Leinberger in the Atlantic is wondering if we can go back to the early 20th century practice of letting developers build rail transit lines, and reap the resulting increase in property values. This idea is likely to have a lot of superficial appeal, because it combines two pervasive attitudes in New World countries: (a) nostalgia for a supposedly simpler past and (b) a suspicion, especially common in the US, that government is always intrinsically less competent than the private sector.

But as someone who’s been around a lot of privately-funded transit projects (usually called public-private partnerships or PPPs) I think it’s important to pour some cool if not frigid water on the idea:

  • Most construction projects that were financially viable in 1900 would not be viable today, including the foundations of the great rapid transit networks that we see in Europe and New York.  In 1900 there were no environmental laws nor many labor laws of substance, so of course construction was vastly cheaper.  (This point needs to be raised not just in response to privatization-nostalgia arguments such as Leinberger’s, but to all forms of nostalgia about old technologies.)  It’s tempting to believe that we build subway lines so much more slowly than Europe did around 1900 because we’ve lost some collective will.  While that’s partly true, it’s also true that the values of today — especially as they relate to environmental impact and labor — are different, and more expensive, than they were back then. Countries that are building rapid transit today, such as China and India, generally have much lower labor costs and less onerous environmental impact processes (which is to say, much less effective ones).
  • A constant frustration around PPPs is the suspicion that government inevitably has the weaker hand in negotating them, and that as a result the benefits flow primary away from the public purse.
  • Private enterprise is efficient only in response to competition.  Construction work on a rail project almost always goes to the private sector, because it’s easy to set up a robust competition for that work.  But it’s harder to expose the private sector to competition when one company or consortium takes over planning and financing as well as construction.  In Australia, the privatization frenzy has given us privately owned road tunnels and privately owned pieces of urban rail networks.  No competitive pressure operates on the toll-collecting owners of these projects after they’re built.
  • When we’re talking about privately owned bits of a larger network, it can be hard to get the necessary integration with the rest of the network.  Privately funded pieces of transit infrastructure often need higher fares than the publicly-owned bits, and these add complexity to the fare system.
  • A private operator of public transit will care about total revenue but may not care about ridership.  A few high-paying riders give you as much revenue as a lot of low-paying ones.  But we the people DO have an interested in services that carry more people, and that interest is hard to manifest in typical privately led rail projects.  Sydney has one privately built segment in its rail network — the four-station Airport Line — and its fares ($15 one way, airport to city) are so high that it’s cheaper for me to take a taxi.  The two non-Airport stations on the line have missed out on a lot of redevelopment opportunity because the fares are just too high for the system to be useful.
  • Finally, developer-funded rail lines were used around 1900 to open up huge greenfield areas for new urban development — greenfields that tended to be consolidated under one or a few owners.  Today, we would call that sprawl.  Today, also, land ownership is much more divided and hard to organize, even on the suburban fringe.  Rail lines intrinsically bring their benefits to a large area, and only the government is usually in the position to spread the costs correspondingly widely.

In both the transit industry and the urban design world, we hear a lot about how great things were in 1900.  But I’m glad to be living now rather than then.  Aren’t you?

UPDATE:  In respose to a superb opening comment by Alex Block, let me clarify that I am not arguing against value capture or tax-increment financing, which Leinberger also endorses.  These are methods of financing a rail line partly through debt that will be repaid based on higher land values — and thus higher land taxes — that the line will generate.  There is no reason we can’t continue to expand on these principles as a revenue source.  I’m criticizing only the more simplified nostalgia on which Leinberger builds his argument.

31 Responses to On Privatization Nostalgia

  1. Alex B. May 16, 2010 at 4:55 pm #

    You write:
    Finally, developer-funded streetcars and rail lines in 1900 were used to open up huge greenfield areas for new urban development — greenfields that tended to be consolidated under one or a few owners. Today, we would call that sprawl.
    I disagree, we would call that suburban growth. We would not and should not call it sprawl, as outward growth is only one factor of sprawl. Those transit-oriented developments were fairly dense, they were walkable, they were mixed-use. Sprawl as we know it today is not merely the product of outward growth, it is a distinct form characterized by low density, auto-oriented, segregated land uses.
    I think all your points about nostalgia for developer-driven transit are good, but I also think you’re setting up a little bit of a strawman for what Leinberger is arguing. He is essentially arguing for a value capture mechanism that can make use of the positive externalities that transit offers. The value capture mechanism is the key point to finance these improvements. Quite honestly, whether that value is captured via the public or the private sector is just the details, the fact that there is value to be captured is what matters.

  2. Jarrett at HumanTransit.org May 16, 2010 at 6:06 pm #

    Alex. Value capture is a hugely important and under-exploited tool in rail transit development. But in a modern rail transit corridor, so many land-owners benefit along the line that you can’t expect any one developer to organize them and finance a new line through value capture. Strong governments, including public transit agencies, are the only actors in the position to do that.
    Re sprawl, I guess it depends on your view of the outer edge of whatever city you have in mind. If you view sprawl as Oregon Governor Tom McCall did when he led the development of the Oregon land use system in 1972, any expansion of the urban footprint is sprawl regardless of what’s built there. His motivation was entirely about agricultural protection, or what we would today call food security, and that certainly is one valid perspective on the “sprawl” issue. (Robert Bruegmann, in his book Sprawl: A Short History, uses the term to include nearly all horizontal expansion of cities at lower densties than the core. To him, Versailles is just “17th century sprawl.”)
    You’re right that in 1900, rail could be used to build very densely in greenfields, but I question whether that’s still possible. It’s been very difficult to build at any reasonable density on the outermost edges of American and Australian cities, because people have options for lower-density living that they didn’t have in 1900, and the people who do want to live at high density don’t want to live that far out. So in practice, I have trouble imagining an American case where an obviously bit of new rail line into greenfields could make any sense as a single developer’s project, which is the process for which Leinberger seems to pine.
    So yes, value capture is a great thing. I’ll add that to the post.

  3. Ben May 16, 2010 at 6:42 pm #

    What bothers me about environmental assessments today is that they take YEARS to finish. I don’t know what’s involved with this, but I work for the federal government in an agency that is tasked with being an environmental steward, and I can only imagine the bureaucracy that takes place with transit-based environmental assessments if it’s anything like my office. The problem with the federal government is that it sets up rules and regulations based on the worst case scenario, and then applies it to the whole country, giving agencies NO leeway in local situations.
    It seems like nobody stops to think, hey, you know what? We want to build a high-speed transit line through an area that is already severely impacted by humans anyway (i.e. an EA for somewhere like the Everglades would be the exception, not the rule to apply EVERYWHERE)… plus, the net environmental benefit from building this transit line would be a POSITIVE (i.e. fewer cars on the road), even if we destroy some little animal’s habitat.
    So really, let’s just skip 95% of these EAs and get on with it. I’m serious. It’s mostly a waste of time and resources, when in reality, even after years of this BS, they’re going to build the line anyway.

  4. Alex B. May 16, 2010 at 6:45 pm #

    Good call on value capture. That’s at the core of the issue here.
    One other thing that I thought was a good point from one of the comments at the Atlantic site – there’s a difference in value in the examples Leinberger cites. One in particular is an infill station here in DC (the New York Ave station on the Red Line). The commenter notes that this station has much more value because it connects an area ripe for redevelopment to an existing, robust transit network. That’s what makes the value capture work – the transit network is strong. However, if you try to apply that same principle to an initial segment of a system, you’re not likely to be nearly as successful, since that initial segment doesn’t have nearly the same value as the more established and robust network.

  5. Alon Levy May 16, 2010 at 7:07 pm #

    There are developed countries with workable environmental laws that still build very quickly. For example, Japan built infrastructure at breakneck pace in the 1970s; Spain did the same in the 2000s.
    China is actually not that good an example of building. Its system design is poor – ask me sometime about the joy of Shanghai’s transfers or fare collection. The system looks modern, but in terms of service levels, it’s more like 1910 than like the seamless, perfectly coordinated transfers of Switzerland. It isn’t even cheap, after adjusting for living costs. It’s just that when you’re industrializing rapidly, you can afford to waste money on capital.

  6. EngineerScotty May 16, 2010 at 8:00 pm #

    Hong Kong’s franchised bus system works extremely well–though given the high density (and limited land supply that drives it), I’m not sure it can be directly replicated in too many other places. Essentially, for those unfamiliar with HK, bus routes are assigned to private operators who bid on them and then then operate them, keeping fare proceeds. The government ensures a uniform fare structure and infrastructure (the excellent Octopus card), and regulates things like safety.
    In most places, when private firms operate public bus systems, it’s the government who pays the operator, not the other way around.
    At any rate, this thread has so far ignored one other major argument for privatization: labor costs. Even in places where the political consensus isn’t pro-labor, and where provision of high-paying jobs for bus drivers and mechanics isn’t considered a part of the transit authority’s mission, private operators have a reputation for being better able to drive down labor costs, and in some cases bust transit unions outright. Couple that with a widely-held perception (in the US, at least) that public employees in general are overpaid layabouts (a perception I certainly don’t endorse as a general principle, though I can certainly think of examples), and you’ll find a very common rationale for privatizing everything from transit to utilities to schools.
    Of course, as Alon noted in a prior post–in the US, the labor friendly cities correlate well with the transit-friendly ones…

  7. Jarrett May 16, 2010 at 8:04 pm #

    Scotty. Yes, I agree with your views when it comes to privatization of operations, but in this post I was thinking about privatization of capital investment and infrastructure, which is Leinberger’s topic. An interesting debate on privatization of operations is happening over at http://capntransit.blogspot.com/2010/05/what-transit-needs-from-government.html and preceding posts.

  8. Helen Bushnell May 16, 2010 at 11:23 pm #

    I think that fact that private transit often does not pay its employees fairly is a reason against privatization. The economy in the US is in bad shape because the people who actually work are getting less and less money.
    Bus drivers (and teacher and nurses) should make more money than lawyers.

  9. ws May 16, 2010 at 11:49 pm #

    It’s hard for a rail line to be run as a private entity when the highway running next to it is propped up by public subsidies.
    I think it’s fair to say that if there was absolute competition amongst all transportation forms, costs would come down considerably and the most efficient modes would take root.
    I do believe that local roads, sidewalks, boulevards, etc. should absolutely remain public, but I have no issue with highways and rail lines becoming privatized from my standpoint.
    That could change.

  10. Wad May 17, 2010 at 12:19 am #

    As I pointed out in the other thread that mentioned developer-built transit in brief, you also have to factor in the behavior of the investment markets.
    Fiduciary duty makes such a scheme unsustainable.
    Investors, particularly stockholders but it can apply to bond bearers as well, don’t care about the inner workings of a company.
    They won’t appreciate any symbiotic need between real estate and transit ridership.
    If one aspect — most likely real estate — generates a great deal of earnings, the company is going to be broken apart. Investors want to focus on the choice earnings.
    Paradoxically, the only way to keep the company whole and symbiotic is to keep both the real estate and transit earnings in balance by somehow stunting values.
    This will lead to investors either turfing management or bringing legal action against them.

  11. Chris B May 17, 2010 at 4:53 am #

    Isn’t Metro Vancouver committed to value capture with the proposed Evergreen Line, where they are holding onto the land around the stations so that it will be them, rather than unnamed developer that benefits from the construction that follows rapid transit?

  12. Danny May 17, 2010 at 8:07 am #

    Generally speaking, I am a huge fan of private operation. And I am a huge critic of the wage structures that government entities have. I hate how inefficient government operators of transit are, because the more efficient it is (including lower labor costs), the more transit you get for the money.
    Jarretts point about competition is the downfall of the privatization supporters. Private enterprise isn’t inherently more efficient, it is more efficient when it is exposed to competition. Local transit is a perfect example of a natural monopoly…a business that is most efficient when it controls 100% of the market. Any private operation of local transit will result in consolidation after consolidation until few or no competitors remain, and then you are left with a single operator who holds the city hostage with higher-than-competitive prices that maximize profits. It can be even worse than how transit unions hold the city hostage with exorbitant wage demands.
    With intercity transport, you don’t get that same dynamic. Lets say I run my own high speed rail line. If I raise prices too much, I can lose market share to a different line, or substitutes like buses, cars, or airlines. Furthermore, the higher my prices are, the greater the threat of new entrants. The same goes with level of service.
    The funny thing about intercity travel and other businesses that are not natural monopolies is that even when there is little or no competition, pricing and service levels have a way of staying in check. When a company has no competitors, they can choose one of two general pricing strategies: Skimming or Penetration.
    With price skimming, you price the product as high as you can, and sell to the people who demand it the most. Then when competition appears or you saturate that market, you drop your price a little more. And you keep doing that until you have completely saturated the market or competition forces you to do so. The interesting aspect of this is that it is an implicit acknowledgment that competition is on its way. In fact, price skimming is an invitation to competition, and is a strategy that is almost always reserved for products with short life cycles.
    Penetration pricing on the other hand is an explicit acknowledgment that you want to prevent competition. You start out priced low, and you keep your prices low to gain market share and to discourage new entrants.
    With intercity rail, any strategy that invites competition is a losing strategy. If you build rail transportation, you are in it for the long haul, and you want to keep out competition as much as you can. Anybody who fears the idea of a private company keeping prices high needs to ask themselves first: Is there any competition? Is there the threat of new competition? Is this a natural monopoly situation? Many times, the fear of private market monopolization is unfounded and based in an incomplete understanding of how market participants act.
    This threat of competition is the reason why Rockefeller kept prices as low as possible even when he had almost zero competitors. The second he takes advantage of his monopoly status and jacks up prices, he brings in new competitors.
    But when it comes to extremely important services like intracity transport, where it is a natural monopoly, then use the government. Just try to structure the business to operate like a private business would in an extremely competitive environment…or else you get MUNI.

  13. EngineerScotty May 17, 2010 at 8:54 am #

    To add to what Danny says–what really happens in intercity transportation markets is a combination of both penetrative and skimming strategies, through the magic of price discrimination. There’s always some rich guy willing to pay 10x or more the standard fare for nicer accommodations and segregation from the unwashed masses–hence the whole concept of first class travel.

  14. Boris May 17, 2010 at 10:07 am #

    During my trip to Japan a couple of years ago, I got the impression that privately built and operated transit lines do exist and make money, under what I imagine to be fairly restrictive environmental laws and highly paid workers.
    In many cases, it seemed that these private operators combined businesses so that one drew traffic to the other; e.g., a train station that is basically a mall encourages transit riders to shop and shoppers to ride transit. So Wad’s argument that investors “won’t appreciate any symbiotic need between real estate and transit ridership” doesn’t seem to make sense. Plenty of businesses cross-subsidize one operating unit with the profits of another, and it makes sense to do that as long as more money is made in total than if each unit existed individually.
    These projects took place in areas of high density and existing demand for transit service and shopping. But it’s not hard for me to imagine a situation where a US township agrees for a greenfield site to be developed at greater density than typically permitted if the developer also picks up the costs of a rapid transit line (or any kind of infrastructure, for that matter).

  15. Misha May 17, 2010 at 10:18 am #

    I agree with the details, but not with the underlying concept. “Private-Public Partnerships” are in my eyes an evil hybrid – Government uses it’s power not to supply some otherwise unattainable good, but to ensure profit – for a private body. Picturing that as a practice that involves more free market operation than pure government action is misleading.
    More generally to the feasibility of purely market driven public transit – I believe it can’t be judjed currently. The whole street network is manipulated by the government not only by being subsidised, but (more importantly perhaps) by being controlled by it. In this situation a “natural” monopoly (as Danny described) is almost unavoideable, as transit is forced into limited routes and competes with cars. I wonder if it would be as profittable for a private street owner to collect tolls from cars as it would be from transit – not speaking of other possible benefits from having transit dominate your street.
    As to the efficiency and convenience of consolidated networks – I’m again not so sure we could reject the idea of a free market creating a few competing networks outright.

  16. Joseph E May 17, 2010 at 10:54 am #

    With intercity travel, there is a real risk of private companies maximizing profits over public benefit, especially in smaller markets. If you want to travel between Tokyo and Osaka, or New York and Washington, you can take a number of different trains at different speeds and prices, you can drive, take a number of different buses, or fly a multitude of competitive airline. So the prices and service are good and fairly efficient.
    But you if you want to travel from Brisbane to Gladstone (Australia), or Los Angeles to Medford (Oregon), you are only going to have a handful of plane flights and perhaps one slow bus route to chose from, if you don’t want to drive. In these smaller markets, plane tickets are often 100’s of dollars. Now, Medford to Los Angeles is getting 3 direct flights a day from a low-cost airline, soon, but who knows how long they will survive. Prices are usually $400 for the 500 mile plane trip.
    With high-speed intercity rail in the United States and other emerging intercity markets, there will be strong pressure for private operators to maximize profits. That’s what Amtrak does with Acela, with tickets higher than airfares. In California, the trains could make a profit with ticket prices 1/2 that of airfare from San Francisco to Los Angeles, but they would make a bigger profit with tickets at 90% or perhaps even 100% of the cost of airfare, despite lower ridership. If the goal is to maximize profit, your course as s private operator is obvious.
    But if you are trying to reduce traffic on the freeways, reduce airport congestion and need for expansion, and reduce dependence on foreign oil imports, then the lower price and higher ridership would be a much more important benefit. The higher ridership alone is a societal good, representing increased mobility for the citizens of California. But a private operator has no way of capturing that value, unless the state subsidizes them on a per-rider basis.
    Local transportation infrastructure, like urban toll roads, subways and local buses, is even more like to lack competition, resulting in poor service and high prices if managed for profit. Just look at the slow, crowded bus systems in any developing country, compared to efficient, subsidized systems in Europe, or modern BRT systems in progressive developing nations.

  17. Danny May 17, 2010 at 11:20 am #

    The “slow, crowded bus systems” that I experienced in Honduras were much faster than any other bus system I have ever seen. I’m talking never having to wait more than three minutes for a bus, and getting anywhere in the city in less than half an hour.
    Of course that system was centrally planned, with route licenses sold to whoever could comply with regulations, and at a fixed price city-wide. But the buses, drivers, fare collectors, maintenance, etc…all were privately owned.
    Competition between bus companies was effectively regulated, but it was enough to ensure a frequency unseen in the developed and subsidized world.

  18. Mike May 17, 2010 at 1:47 pm #

    Someone mentioned the fast pace of construction of urban rail lines in Spain and Japan under more stringent environmental, construction and labor laws. I’ve tried looking hard, but haven’t been successful, so I am asking here: can anyone point me to a source (book, article) that talks about this? Thanks.

  19. MB May 17, 2010 at 3:38 pm #

    One thing we’ve experienced here in Vancouver is several P3’s or private construction projects delayed, re-oriented or nixed by the Credit Crisis of ’09.
    One of them was a $3 billion portion of a $6+ billion freeway project (including a gargantuan 10-lane bridge) where the private international consortium pulled out LAST YEAR after their U.S. financiers tumbled. The government of British Columbia had to step in and take over, and the long-term public provincial debt will increase to record levels in part because of this incident.
    However, the borrowing terms are usually much better for governments with AAA credit ratings than for the private sector in general. Usually, this adds up to tens if not hundreds of millions of dollars in savings to taxpayers over the decades-long amortization period.
    This, however, is of little consolation to those of us who find the whole freeway business distasteful in light of the concerns over energy security, environment and human-scaled urbanism, issues that are becoming increasingly important this century.
    The federal EA of this project trashed it, but the feds were loathe to tread too harshly on local interests with any meaningful action. The provincial EA of this, their own project, was by comparison a sham, yet the provincial EA regulations are pretty stringent and are commonly imposed on the smaller fish, like municipalities.
    The $2 billion Canada Line rapid transit project was a P3, but it turned out relatively successful. Credit wasn’t a big issue in 2007/08 when the project got underway. They obtained near break-even ridership (100,000 per day), which exceeded their projections by about three years. The private consortium that designed, built and operates the line requires very little top up from the local public transit authority, and it can look forward to 30+ years of profit.
    However, the consortium also designed a system with built-in limitations, like 40 metre station platforms instead of 80 or 100, utilizing Rotem vehicles that are incompatible with the existing Bombardier SkyTrain system used on two other lines, and imposing cut and cover tunnelling on a major road in an active neighbourhood for 23 continuous months, all just to keep their costs down. The public sector partners rolled along with these moves despite their serious ramifications.

  20. EngineerScotty May 17, 2010 at 4:10 pm #

    MB brings up an excellent point: Given that a) governments can generally borrow on better terms than even the most well-heeled private entities, and b) government debt frequently has tax advantages for investors to boot–one may ask: Why would a government agency seek private financing for public projects, when that financing will generally be more expensive than what could be obtained on the government bond market?
    The answer, of course, is that issuing bonds generally requires raising taxes up front–something many transit authorities are unwilling or unable to do. Public-private financing seems to be based on the hope that the construction costs can be paid off by future operating revenues, a method of financing which governments can’t do directly. But–and this is the point–it isn’t free money. Either way, the money will come out of the public hide in some fashion–whether as explicit taxes, or the opportunity cost of using future ops revenues for some other purpose (including returning it to taxpayers).

  21. EngineerScotty May 17, 2010 at 4:32 pm #

    In the same vein as my previous post–many forms of private financing for public projects (especially on the capital side) are essentially the same financial skullduggery as TriMet’s obnoxious (and much criticized practice) of bonding its operating tax revenues to pay for new construction.
    Both are too-clever-by-half ways of transferring money from the operating bucket to the capital bucket–when in reality, capital funds are far easier to raise.
    And at least with TriMet’s tactic, the agency still enjoys the advantages of being a government creditor, and isn’t having a third party slicing off a percentage for bringing its money to the table.

  22. MB May 17, 2010 at 4:33 pm #

    @ Engineer Scotty: “…the money will come out of the public hide in some fashion…”
    You got that right, Scotty. In the case of the Canada Line the BC government bragged that it only spent +/- 700 million on a 2 billion dollar project, and transferred all the risk to the private partner.
    Well, the masses aren’t stupid. They know they will take a hiding during the amortization period, albeit in tiny personal farebox pluggings, and the design and construction shortfalls will not be tolerated anytime in future. “Cut N’ Cover” is now shorthand for Class Action Lawsuit.

  23. EngineerScotty May 17, 2010 at 4:36 pm #

    Minor correction: Rather than “government credtitor”, I mean “government debtor”. 🙂

  24. Wad May 17, 2010 at 8:29 pm #

    Engineer Scotty wrote:
    Why would a government agency seek private financing for public projects, when that financing will generally be more expensive than what could be obtained on the government bond market?
    It has more to do with ideological dogma than anything else.
    In the U.S., you have the right wing who insists that government has zero right to economic agency (i.e., use and spend money). In the U.S., there’s no countervailing power like a European socialist party that would be the equal-and-opposite reaction (i.e., all economic activity must be by the hand of state).
    So what’s left is a group (the Democrats) that feign they are a countervailing power while acting in the capacity of a broker.
    This results in what is known as compromise. The countervailing force charade is dropped altogether, while the brokers are able to get concessions that are enough to hold back the barbarians at the gates yet leave the provisions that’ll leave the power positions intact.
    In short, we get public-private partnerships because in the spirit of compromise, capitalists cannot be granted a full monopoly on economic activity but will settle for a small compensation to ensure they get a cut of the action.
    Outside of the U.S., though, 3Ps are often used to chum the investment market waters. By putting out a small amount of investment-grade securities, both the public and private powers hopes it’s enough to start a larger feeding frenzy of trading transactions.

  25. Brent May 18, 2010 at 10:46 pm #

    There is some historical context that has been left out of #5 in the post, and the first two comments.
    Yes, “developer-funded rail lines were used around 1900 to open up huge greenfield areas for new urban development”. But these developers had a major incentive to fund rail construction: rail (particularly streetcars) were the primary mode of transportation. Without a streetcar line to/through a subdivision, it would be isolated and unattractive for development. Subdivisions were often touted as being connected to the city via a new streetcar line or extension. Because rail was the primary mode of transportation, there was also therefore a ready market of transit riders that would make the new line profitable (and furthermore, there was still a very strong downtown-oriented ridership pattern). Consider the transit line as a “loss leader” both for selling subdivided lots, and for expectations of future ridership profits.
    This does not work as effectively today not because of land fragmentation (lots of suburban tracts have been assembled into larger parcels by big developers), but because transit is no longer the only option, and because even if you build next to a commuter rail line (for example) there will still be lots of residents who commute to suburban industrial parks where transit is unattractive — the pool of potential riders has been diluted.
    If anything, the privatization argument is (unfortunately) perhaps better served to roads and/or highways — developers are often required to contribute to the cost of new or widened roads to access their subdivisions, but are rarely required to build transit infrastructure.

  26. Alon Levy May 19, 2010 at 10:05 am #

    If you want to know what happens when a monopoly isn’t regulated, look at American freight railroads. Nearly every major regulation in the early 20th century was geared toward reducing their abuses. Even today, BNSF and UP jack up prices on routes where they have a monopoly.

  27. anonymouse May 19, 2010 at 10:07 am #

    And if you want to know what happens when monopolies are regulated, look at the freight railroads. They were dying in the 70s, to the point where Penn Central needed two huge government bailouts (Amtrak and Conrail), thanks to regulations that fixed shipping rates at uneconomic levels, and mandated over-staffing of trains even as labor got more expensive.

  28. Alon Levy May 19, 2010 at 10:21 am #

    Yes, bad regulations kill companies. That’s why some parts of the world have modernized their regulations. JR East/West/Central, the MTR, and even the modern freight railroads are all regulated. They’re just better-regulated than Penn Central was.
    The problem starts when you have people who argue that government doesn’t work and then get elected and prove it. It makes it hard to achieve government competence.

  29. anonymouse May 19, 2010 at 2:35 pm #

    Yes, there’s such a thing as an optimal level of regulation. Too mcuh, and you kill the company (as happened to the railroads), too little, and you end up with all sorts of problems. Furthermore, the usefulness of regulation is not necessarily monotonic. Even if libertarians are right, and no regulation at all will work well, that doesn’t mean that reducing the current level of regulation to some other, lower but still non-zero level, would improve matters at all, and in fact might make them worse. It’s ultimately a complicated issue, and I think the main point that the libertarians make about regulation and monopoly is that regulation sometimes creates the monopoly in the first place, as it did with AT&T, or indeed the railroads (which got massive subsidies in the form of free land in the West that they re-sold to homesteaders for a profit).

  30. Nathanael May 23, 2010 at 9:12 pm #

    AT&T and the railroads are in fact both *natural monopolies* due to *network effects* and difficulty assembling *right-of-way* so no, in these cases regulation did not create the monopoly.

  31. Rick Rybeck May 25, 2010 at 12:41 am #

    This is an excellent post with many informative comments.
    @ Engineer Scotty: “Public-private financing seems to be based on the hope that the construction costs can be paid off by future operating revenues, …Either way, the money will come out of the public hide in some fashion…”
    It is important to note that wherever direct user fees (for both roads and transit) are less than the full cost of building and maintaining the cost of a transportation network, the consumer surplus will be translated into higher land values at locations that are well-served by the network (interchanges, intersections, transit stations, etc.)
    Typically, these higher land values are a huge windfall to those who are lucky or shrewd enough to own these sites. However, a tax on land values can recapture and recycle these values for the public. Indeed, some infrastructure projects could be financially self-sustaining using this technique. (In 1995, land values would have justified the building of a new Metrorail Station at Potomac Yards. See http://www.justeconomicsllc.com for more details.)
    Not only does value capture help fund these projects, it can also induce development where land values are high. By encouraging development at high-value locations (typically near existing infrastructure), value capture can encourage TOD in lieu of sprawl. This helps both the environment and municipal budgets by reducing the duplication of infrastructure into low-density areas that are more appropriate for agricultural or conservation uses.