fork in the road highway Flickr via conanil

This post is co-authored with David King (a displaced Minneapolitan who lives in New York, and who blogs at Getting from here to there).

In recent weeks we have thought about public subsidy for  transit  and university subsidy for parking .

But what about roads? Are roads worthy of public subsidy?

Let’s think about our framework of excludability vs. rivalry. The Transportation Economics wikibook says:

Roads exist largely to serve two purposes: movement and access (specifically, access to property). Different types of roads have characteristics of different types of goods based on their functional classification. In other words, there is a correspondence between the functional classification of a road and the type of good it represents. What types of roads are which type of goods?


The Club Goods Model

It is very clear that users could pay for private goods directly. The most obvious way is a toll, a bit less obvious is a gas tax. Nefarious politicians in a few states have come to realize that a wholesale tax on gas is more hidden than a retail gas tax, even if the incidence is essentially the same. The gas tax collected on users of freeways at the state and federal levels would more than pay for freeways (even if some is diverted to transit and other uses).

Again from the Transportation Economics wikibook:




These kinds of local roads are essentially club goods. The ideal club might be the homeowners association, the downside is diseconomies of local management of roads and potential interruptions in the local road network (e.g. more cul de sacs and fewer gridded blocks). Division of labor is a good thing, but requires scale. So the club is usually the local municipality rather than the homeowners association. The revenue that is collected for this tends to be a property tax, paid for by everyone. Tolls are impractical for local streets because the cost of collection outweighs the benefits.

Fuel And Property Taxes

UK toll plaza Wikimedia Commons

A local option gas tax may also be impractical because the purchase area of gasoline exceeds the size of the municipality (e.g. our most used gas station might be in St. Paul, even if we live in Minneapolis).

Any jurisdiction that tried to raise too much from this fee would see more out-of-municipality purchases, and the gas station (or the landowner of the gas station, if they differ) would bear much of the incidence of the charge.

An additional challenge associated with fuel taxes for roads is that some local roads, when privatized or used as a club, restrict auto traffic. In Minneapolis's Seward neighborhood, Milwaukee Avenue is essentially a club good for bikes and pedestrians. In such cases property taxes are much easier and effective for financing the roads. St. Louis, MO, has long featured private local streets in all types of communities.

From the Transportation Economics wikibook:

Local streets are typically provided by local governments with no restrictions on access. In the absence of access restrictions local streets may be both non-rivalrous and non-excludable, leading them to take on more of the character of a public good. Note the term “public good” in this case is defined by the economic characteristics of the good, and not simply by the fact that it is supplied by the public sector.

Some local streets are not excludable because of their functional design connecting places (one of the drawbacks of a connected network is that it is used to connect people who are not local). So design of the network greatly affects how it is best managed and funded.



The larger jurisdiction (the state) could set a higher fuel tax to redistribute back locally by  some formula , but there still remain different preferences  in different municipalities for different levels of service, which require some locally different levels of funding. How is that to be collected if not a property tax?

The property tax can be thought of as a charge for having the option to access roads and receive public services such as police and fire. There are other types for local tax that can be used; a variety of land value capture mechanisms, from the  land value tax  or split rate tax, to transportation utility fees  change the basis of collection, but even TUFs are still not strictly proportional to use. If a mileage-based usage fee were already widely deployed, it could be varied by municipality to collect more revenue, but that ideal revenues collection scheme is not worthwhile to implement if the only user were local governments, and would require standardization and enforcement to enact.

Regardless of whether one favors or opposes subsidy for roads, distributional considerations of how the subsidy monies are generated are important. We discussed fuel taxes, tolls and property taxes, but many cities and states turn to sales taxes to pay for roads (and transit. For instance, the Minnesota Legislature is  considering an increase in sales taxes  dedicated to transit.

Sales taxes are a shift away from direct user fees and impose the burden of subsidy broadly. Sales taxes also tend to be regressive in that households who end up paying the largest share of their income in sales taxes receive less than proportionate value in return. So subsidy is an issue of distributional fairness depending on how the money is raised as well as how it is spent. At the very least money used for subsidy should not rely on regressive tax policy.

Rationales For Subsidizing Roads:

  1. Universality: Everyone uses roads, everyone should pay.


    Even if you don’t drive, or bike, you still use roads. We had roads before cars and bicycles, and will continue to have them even when we have flying cars in the future. Their nature will of course vary, but at least some of the costs are communal. We collectively want the option to be accessed by ambulance should the need arise, or fire or other emergency services. We all make use of ground delivery for things like the mail or packages. We all partake of public utilities running along public rights-of-way. Even bus riders use roads. We also like to have things delivered. When we order a pizza we use the roads, but we have substituted our travel to the restaurant for the delivery person’s. When we order things online, FedEx, UPS and other carriers use the roads to deliver our stuff. It is impossible to “opt out” of using the road network.

  2. Democracy: Most people drive, therefore it is a subsidy from everyone to almost everyone else, which is more democratic than a subsidy from everyone to the very few.
  3. Administrative efficiency: Paying for roads out of general funds, or with imperfect gas taxes, is a lot easier to administer than trying to enforce specific payments for specific roads at specific times of day. Tolls are costly.
  4. Cost structure: Uncongested roads are on the left-side of the U-shaped cost curve, and charging for them leads to suboptimal levels of use.
  5. Non-excludability: There is not a good non-governmental finance mechanism for signalized arterials, roads which are rivalrous but not excludable. One could establish a congestion charging zone, but those are very expensive, and have yet to be tried outside a few center cities.
  6. Agglomeration benefits: Accessibility leads to positive spillovers for the urban economy and increase total development.
  7. Network spillovers: A better connected network makes all other roads more valuable. Much like the temporal Mohring effect in transit, there is a similar spatial for roads effect, each additional road reduces travel costs between places, increasing demand on other roads (and raising overall usefulness of the transportation network still more). Like the Mohring effect, this too reaches diminishing returns, but it is important when networks are sparse.
  8. Mutually assured subsidy: Transit is subsidized, therefore roads should be subsidized.
  9. Off-mode effects: More roads reduce congestion on other modes (transit, rail, air). Subsidizing roads can help support car-free roads, since bikes and pedestrians currently don’t directly pay for their infrastructure. However, relying on drivers to pay for roads used primarily by non-drivers may lead to principal-agent problems.

Rationales Against Subsidizing Roads:

  1. Overproduction: Subsidies induce overproduction of roads. The lack of pricing signals implies that supply conditions are out-of-whack with demand. In addition, the heavy use of subsidy leads to building roads in the wrong places. We cannot afford to maintain what we have already built, we should not build more. Many states (such as Michigan) are de-paving roads to reduce rural road maintenance costs. Even Minnesota is considering de-paving.North Carolina allocates roads subsidy by county, so lightly populated rural counties are paving every road they can find. Neither system is optimal.
  2. Overconsumption: Subsidies induce overuse. This can lead to congestion.
  3. Negative externalities: Roads, and in particular cars, generate negative externalities which we cannot properly price. At least we shouldn’t subsidize their production.
  4. Off-mode effects: Reducing demand for transit (by subsidizing roads) worsens the strong positive feedback system that drives transit, lowering congestion on transit is seldom the critical problem, encouraging demand is more likely to be important.
  5. Mutually assured subsidy: A key point is that just because we subsidize roads does not mean we should subsidize transit, and vice versa. The economics of the technologies differ significantly. One bad subsidy does not deserve another. Just because transit is subsidized is not a reason to subsidize roads. It may be an argument to remove the subsidies that exist. Mutually assured subsidy is the “fairness” logic of a 4 year old complaining about a sibling.
  6. Obsolescence: Following the Great Gretzky, “Skate to where the puck will be.” Roads will be made obsolete by upcoming technologies, we should cut our losses now.

So What Is The Net?

  1. In the short run, states should raise their gas tax to replace the general (property tax) revenue from a baseline set by lowest common denominator jurisdiction within their domain with user charges. That is, figure out which jurisdiction spends the least per capita on roads, and raise the gas tax to replace the property tax by at least that amount of money for each jurisdiction. In all cases states should be extremely wary of using sales taxes to pay for roads. (States will also need to cover the declining federal gas tax, but that is separate.)
  2. Over time, states should move toward a vehicle mileage fee varying by weight (for trucks and other heavy vehicles), location and time of day to replace the motor fuel tax. This should be phased in with EVs (and Hybrids) which don’t pay (much) motor fuel taxes, and trucks which would be charged for weight and distance, going first. Off-peak discounts would encourage peak-spreading. Rates would vary by area to account for different costs of running networks.
  3. Road networks should be organized and operated like public utilities, managing to generate revenue from users to pay for cost of operations. Restrictions on usage should be allowed in this model, where auto and truck traffic can be limited to specific times of day or excluded altogether. Road design that allows access for emergency services can be regulated.

Read the original article on The Transportationist. Copyright 2013.