From: thompson@atlas.socsci.umn.edu (T. Scott Thompson)
Subject: Re: Question about Libertarian Idealogy posted to sci.econ
Reply-To: thompson@atlas.socsci.umn.edu
Organization: Economics Department, University of Minnesota
Date: Mon, 14 Sep 1992 14:33:12 GMT

demon@desire.wright.edu (Stupendous Man) writes:

>In article <1992Sep12.011348.3455@leland.Stanford.EDU>, bohnert@leland.Stanford.EDU (matthew bohnert) writes:

>> The first that is obvious to me is government subsidized mass transit.
>				     ^^^^^^^^^^^^^^^^^^^^^

>	That's probably the biggest sticking point.  Why waste money on
>inefficient operators?
>	On the other hand, if mass transit is "a good thing" then enough
>individuals and businesses should be willing to participate in the funding,
>building, and operating of a mass transit system.

>	So instead of letting government spend billions to enrich some party
>loyalists, let's let the business community and the population at large decide
>what to build and where to build it.

While I'm generally in favor of letting market forces rule, I have
some qualms about going overboard on mass transit.  My principal
worries are:

1) Mass transit seems to be a perfect example of an industry where
entry costs are so great that a completely unregulated market is
unlikely to produce an equilibrium in which marginal cost pricing
prevails.  Most likely, private operators will be able to restrict
service somewhat and charge prices above marginal costs.  This means
that in the competitive equilibrium we are likely to have less service
and less use of public transit than is socially optimal.  The problem,
of course, is how to ensure that the private operators behave as if
the market were competitive in an environment were the natural
equilibrium only allows for a single producer.

2) Mass transit also appears to be an industry in which socially
efficient pricing can only produce a net positive return over very
long time scales.  I am somewhat skeptical whether private capital
markets value very long run investments efficiently.

3) There are some externalities associated with mass transit systems
that profit maximizing private planners and operators will not take
into account.  The presence or absence of mass transit clearly
influences traffic patterns, noise pollution and air pollution.  For
example, the availability of mass transit generates economic benefits
to individuals who do not use it, in the form of reduced waiting time
in city traffic, and in other ways as well.  Since there is no way for
a private mass transit operator to capture any of the economic gains
generated in this way, the private benefits to a mass transit operator
are less than the social benefits.  Consequently, a private mass
transit planner is likely to overestimate the net costs (to society)
of providing the service, and therefore change prices above the social
optimum.

The problem, of course, is that private balance sheets do not include
all of the social costs and benefits.  In my opinion, an urban mass
transit system that is _not_ losing money according to the
conventional private accounting is probably not providing the socially
optimal level of service and probably not charging socially optimal
prices.

Before all of the libertarians flame me on this one, I should point
out that I am aware that theoretical solutions to the externality
problem exist.  They involve internalizing the externalities.  For
example, if we could also privatize usage of city streets by
automobiles then the private "street" operators could merge with the
private "subway/tram" operators in order to internalize the congestion
externalities.  Unfortunately, this makes the monopoly problems I
mentioned in (1) even more problematical.  There is no way to have
competition in providing roadways in inner city neighborhoods!

It is true that governments do not have great records when in comes to
solving these kinds of problems.  Nevertheless, it is not clear to me
that completely private solutions are available.  I think that some
kind of public decision making and regulation, combined with private
ownership and operation, is likely to be a better solution than
completely private mass transit.  I trust the private operators to
make efficient decisions about which kind of bus/tram to buy, but not
to make socially efficient decisions about where to put highways and
light rail lines.

>	As with the above, plus the only thing the government has that private
>industy wouldn't have is the power of eminent domain.  Now if you've ever had
>your property taken away because of this, you know what I mean when I say it's
>the least profitable way to lose property.

I believe that you underestimate the value of democracy here.  Another
thing that government can do is to make some assessment about where
private and social interests diverge.  Private markets implicitly
assume that no such divergence occurs.

>	Actually, my views are pretty close to yours, I simply don't trust the
>bureaucracy to do a good job.  Personally, I have no objections to government
>planning mass transit, as long as they get businesses who run such operations
>to consult on it.  Then turn the operation over to contracters.

Do you believe that mass transit should be required to make an
economic profit?  If so then you implicitly believe that mass transit
generates no external benefits beyond the private benefits to riders.
Do you believe that unregulated mass transit fares are socially
optimal?  If so then you implicitly believe that mass transit
operators behave competitively despite the practical impossibility of
them having to face competition.
--
T. Scott Thompson              email:  thompson@atlas.socsci.umn.edu
Department of Economics        phone:  (612) 625-0119
University of Minnesota        fax:    (612) 624-0209
Newsgroups: sci.econ