In the free market, we know when something justifies its costs according to revenues. But how do we know if a new railroad justifies its costs? If we let private companies run the train, the train will most likely won’t be profitiable because the alternatives such as roads and air travel are heavily subsidized by the tax payer. Therefore the competition is unfair. So how in the current state of affairs do we know whether it is worth to build a new rail line or not?
Indeed we can’t.
You can’t. Intervention distorts the price mechanism such that marginal preference can’t be measured (i.e. they’ve invested resources that would have been spent on the rail, but it’s impossible to know to what degree). It’s a spirall into socialism, because governments inevitably regulate to cure the problems they’ve created.
This is somewhat tangential, but it seems like you’re jumping from a free-market context to a modern-day interventionist context here. I think you meant to ask, “But how do we know if a new railroad justifies its costs in today’s interventionist world?”
Yes, how do we know? By the way I’m not entirely sure it is technologically possible to have completely free market in transportation, because of the high exclusion costs of roads for instance.
Correct me if I’m wrong. So, since socialist measures have mangled the free-market beyond recognition, thus making cost-calculation unknowable, we are left with no alternative but to pile on more socialist measures in the hope of “solving” the problems that were created by them in the first place?
Z.
There were profitable rail roads built in the 19th century without subsides even in very complicated areas like the Rocky Mountains, given we have much better enginering nowdays, I’m pretty sure they could be profitable in a free market.
How low do exclusion costs need to be for a free market in roads to be feasible?
“There were profitable rail roads built in the 19th century without subsides even in very complicated areas like the Rocky Mountains, given we have much better enginering nowdays, I’m pretty sure they could be profitable in a free market.”
I believe the NYC subway system was private at first and was doing well.
I’m sure someone could figure out how to make it economically sustainable. It might be best to try it out in a less-regulated environment, probably outside of the U.S.
I think the first two posts answered this question: we don’t and we can’t. Do you find that answer unsatisfactory? If so, why?
What do you mean by “exclusion costs”?
I assumed cost of entry.
Exclusion cost would be the cost of making the product “excludable”. Some products are naturally excludable (If I eat this apple, you can’t), while others are not. I guess the fear is that people will get on your road without your permission, therefore you cannot charge them, and fixing this problem would be expensive.
Except it’s really not. Anyway, exclusion costs would depend on business model.
How can you exclude people from using roads? It is cost efficient in highways where you can place cameras that will photograph the licence plates, but in country roads it just won’t make economic sense, and without exclusing freeriders, the positive externalities will be too significant for the market calculation to correctly capture the costs.
Don’t underestimate the power of passive barriers. Even low concrete barriers or guard rails would deter the vast majority of drivers, I think. Then again, many roads could simply be use-at-your-own-risk, especially in rural areas.
See this for more thoughts on free-market roads.
Would you always want to exclude people from using roads? Is it possible that a different dynamic would come about if left to the free market? Do you have to charge people to use the road to make it economicly beneficial? Are there different models that could be used for different situations?
Ex) Major highways such as Interstates that connect major cities could be created on a toll road model. It would relatively easy to place toll booths at all entrances to the road in both urban and rural settings.
Rural roads that connect small towns together could be funded by the local chambers of commerce or similar organization. After all wouldnt it be in the local business mens and local industries best interests to connect thier towns with surrounding towns and cities?
Local roads in towns and suburbs could be built and funded by the developers who build the neighborhoods then have the title to the roads transfered to the homeowners association who could then use HOA fees to pay for maint. and repair.
My point is only that excluding people from using a road and charging those who do is only one possible way to make roads profitable or beneficial. There are other ways and reasons to build roads.
I think you’re showing entirely too much confidence in your ability to out-think a free transportation market. This is, imo, the primary conceit of many economists; they’ve convinced themselves that because they can describe economic phenomena (accurately or not) that they are a suitable replacement for the entrepreneur.
As I said above, the exclusion cost depends on business model. You are assuming every road will take a toll road model and so would need toll road-like systems to exclude non-paying users. You are also assuming that the free market would have provided the same road distribution as what we have today. I have no idea what the transportation market would look like in the absense of intervention (I’m not a transportation entrepreneur, after all), but I can say that it would be better aligned with the demonstrated preferences of consumers.
The price distortion that the socialist bring to the rail industry does not completely prevent a market survey that will determine if a venture will be viable. ie it can be calculated in spite of the socialist distortion. But it won’t be as accurate. You can take future energy costs and shortages in to consideration and consider the amount of people that will be exposed to the rail network and do basic calculations to find out if it would be viable. Based on population numbers and cost and time in relation to petrol costs for the same distance and convenience and other factors. But if it was a complete free market the calculations would be different, you basically work with what you have to find out as much as you can if a venture could be viable.
It’s impossible because the intervention has distorted the price signals. It’s still better to have a free market in trainsportation though. The very fact that (in case you privatise, let’s say, railways) companies are willing to buy them shows that they are willing to deal with this cost problem even though they don’t have the perfect means to do it. The solution, of course, is to stop subsidizing transport-related services/products as well as remove all barriers to entry in order to bring genuine competition in the market.
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
— Friedrich von Hayek