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Economic Efficiency Implications of Optimal Highway Maintenance Policies for Private Versus Public Highway Owners

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Economic Efficiency Implications of Optimal Highway Maintenance Policies for Private Versus Public Highway Owners 22 TRANSPORTATION RESEARCH RECORD 1116 Economic Efficiency Implications of Optimal Highway Maintenance Policies for Private Versus Public Highway Owners DAVID GELTNER AND RoHIT RAMASWAMY The Idea of transport Infrastructure privatization has been infrastructure privatization. Key questions in this regard are (a) receiving Increased attention recently from researchers and Would private infrastructure owners charge an economically policy makers. In both Britain and the United States, as well as efficient price to the users of the infrastructure? and (b) Would in some developing countries such as India, the idea or high­ private infrastructure suppliers provide efficient levels of quan­ way ownership privatization Is being seriously considered and tity and quality of product or service over the long run? In some cases Is being implemented. Most research to date has focused on the technical or financial feaslblllty of highway This paper focuses on a specific aspect of the second ques­ privatization or of using tolls to finance roads. This paper ls tion. In particular, a hypothetical privately owned toll highway motivated, rather, by the question of the economic efficiency of is considered. The profit-maximizing highway pavement highway ownership privatization. The paper focuses on in­ quality maintenance policy for this highway is compared with depth analysis In an effort to quantify what may be the main the socially optimal or economically efficient policy. Meth­ issue In the question or the economic efficiency or privately odologically, this paper contains an extension and application owned highways-the problem of suboptimal highway physi­ of other work previously presented to the TRB (1, 2). cal quality, which could result over the long run from highway 111aintenance policies that seek to maximize immediate private profit rather than overall economic welfare. The paper shows that for a typical representative highway the profit-maximizing DEVELOPMENT AND IMPLEMENTATION OF maintenance policy would produce poor highway quality that THE ANALYTICAL MODEL over the long run would be considerably poorer than the welfare-maximizing quality. However, the paper concludes In this section the assumptions and mathematical model used in with a benefit-cost discussion, which Indicates that It stlll could the analysis are presented. be economically beneficial to privatize the ownership or some highways. Economic Background and Definitions The idea of transport infrastructure privatization has been re­ ceiving increased attention among researchers and policy A highway market is defined as the supply of and demand for makers. The English Channel Tunnel and the British Airports highway facilities between two geographic points. The high­ Authority are examples of privatization in practice in Britain. way supply in such a market is characterized by its quantity or In the United States, where more nonhighway transport in­ capacity (e.g., number of lanes); its quality, such as pavement frastructure is already in private or semiprivate ownership, surface quality; and its use price, or toll. The highway market is interest is growing in the idea of expanding the role of the said to be inefficient in the allocational sense if the supply private sector in public infrastructure provision and finance, in characteristics (quantity, quality, and price) could be altered so particular, in the fields of highway and mass transit facilities. In that potentially everybody affected by the market could be a particularly striking example, a group of private investors in made better off. For example, if the toll is set too high, some Denver has announced a project to develop a 180-mi, $800- people who otherwise value the use of the highway at more billion, 80-mph turnpike in Colorado. A private development than what it costs society for them to use it will be priced off consortium has also proposed to build, own, and operate a 30- the road, resulting in a net loss of welfare for society. In such a mi extension of the Dulles Airport Tollway in the Washington, case, society would be allocating too few resources to the use D.C., area of Northern Vrrginia. of the highway with the too-high toll, and perhaps allocating Much of the attention in the discussion of infrastructure too many resources to the use of other alternatives. privatization has to date been focused on the question of its Most highway markets exhibit imperfections or market financial feasibility and its capability for obtaining additional failure that cause the profit-maximizing supply characteristics revenues to pay for infrastructure without recourse to taxation of the highway to differ from the efficient (or socially optimal and the government budget. Relatively little attention has been or welfare-maximizing) levels. If toll roads only are addressed, focused on the question of the economic efficiency of transport there are two major imperfections or sources of market failure in such markets: (a) economies of scale or indivisibilities in production, as well as sunk costs involved in market entry, all Massachusetts Institute of Technology, Department of Civil Engineer­ ing, Transportation Systems Division and Center for Construction of which lead to some degree of natural monopoly or incon­ Research and Education, Cambridge, Mass. 02139. testability (market power); and (b) external benefits and costs, McFarland and Chui 21 TABLE 7 VALUES OF TIME, WEIGJITED oretically as the other techniques and has the definite advantage AND UNWEIGHTED, BY TIME OF DAY AND of being applicabfe to a statewide cross section of Texas SEAT BELT USAGE motorists. 1984 $/hr Timeof Previous researchers in Great Britain and the United States Day Belted Unbelted Average have used the speed choice model to calculate the trade-off between time and accident costs at different average speeds and Unweighted by Hours of Travel for different average costs. This study represents an improve­ Day 10.76 13.00 11.84 ment over previous sn1dies in that specific speed decisions and Night 9.61 14.27 11.71 cost curves are used for each individual in the study, instead of All 10.47 13.32 11.81 using average speeds and average cost functions. Weighted by Hours of Travel The principal data problem in using the speed choice model Day 6.67 8.72 7.65 involves the estimation procedure for the cost of fatalities. To Night 5.71 10.91 8.05 estimate this cost, the study adopted the foregone earnings All 6.43 9.67 7.75 approach. Depending on hourly wage, age, race, sex, and education level, each individual's value of life was estimated. The value of time for a driver of a passenger car after being TABLE 8 VALUE OF TIME weighted by annual travel time spent by individuals, by seat 1984 $/hr belt use, and by the time of day, is found to be $7.75 in 1984 dollars, or $8.03/hr after being updated to 1985 using the Four-Lane Two-Lane consumer price index. Assuming an occupancy rate of 1.3 Condition Belted Unbelted Belted Unbelted persons per car, the recommended 1985 value of time for Day 6.67 8.72 4.71 8.56 passenger vehicles is $10.44/veh-hr. This is the value recom­ Night 5.71 10.91 7.18 18.73 mended to be used in benefit-cost analysis in Texas. Overall weighted value of time 7.75 8.01 REFERENCES $7.75/hr. For comparative purposes, Table 8 gives the values of 1. N. Bruzelius. The Value of Travel Time. Croom Helm, London, time derived for using desired speeds (and costs) on four-lane 1979. and two-lane highways. Although there is considerable varia­ 2. H. Mohring. Urban Highway Investments. In Measuring Benefits tion between subgroup values, the overall average is similar for of Governmenl brvestments. (R. Dorfman, ed.), The Brookings the two road types. It is recommended that the value of $7.75/ Institute, Washington, D.C .. 1965. hr be used for benefit-cost analysis. 3. D. Ghosh, D. Lees, and W. Seal. Optimal Motorway Speed and Some Valuations of Life and Timc. In The Manchester School of Economics and Social Studies, Vol. 73, 1975, pp. 135- 143. 4. J. M. Jondrow, M. Bowes, and R. A. Levy. Optimal Speed Limit: CONCLUSIONS AND RECOMMENDATIONS A New Approach. In Transportation Research Record 88'7, TRB, National Research Council, Washington, D.C., 1982, pp. 1- 2. The speed choice model was chosen for estimating values of 5. R.H. Pusch. Okonomie des Faklors Zeit in Personenverkehr. time because it can be applied across a representative statewide Herbert Lane, Bern, Switzerland, 1973. sample of Texas motorists. Two other methods judged to be 6. L. Sachs. Applied Statistics, A Handbook of Techniques. Springer­ Verlag, New York, Heidelberg, Berlin, 1982, pp. 279-281. good theoretical approaches-the choice of mode (especially 7. J. P. Zaniewski, B. C. Butler, G. Cunningham, G. E. Elkins, M. S. bus verslLc; automobile) and the choice of route (espocially toll Paggi, and R. Machcmchl. Vehicle Operating Costs, Fuel Cun­ road versus alternate free route) methods-cannot be used as sumption, and Pavemenl Type and Condition Factors. Texas Re­ effectively because many Texans seldom, if ever, ride buses search and Development Foundation, Austin, March 1982. (especially not for rural trips) and few situations are available 8. D. Solomon. Accidents on Main Rural Highways Related to Speed, Driver, and Vehicle. Report HS-001 191. U.S. Bureau of in Texas where choices involving toll roads are made. The Public Roads, July 1964. speed choice model has been criticized by some researchers as 9. J. O'Day and J. Flora. Alternative Measures of Restraint System having the weakness of assuming that motorists know the Effectiveness: Interaction with Crash Severity Factors. SAE Tech­ expected costs of different road types as related to travel speed. nical Paper Series 820798. Highway Safety Research Institute, The University of Michigan, Ann Arbor, June 1982.
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