Privatizing Highways--Posner's Response to Comments

There were a number of interesting comments; I limit myself to respomding to three. One is that the lessee overpaid; this is possible if the lessee is ambitious to acquire other U.S. highway systems and wants, and is willing to pay for, "first mover" advantages; other states will be more inclined to deal with a pivate highway operator who has a track record. The second comment is that the private lessee of the Indiana Toll Road will have an incentive to skimp on maintenance in order to reduce costs and thus maximize profits. Notice the tension with the first point: if the lessee is ambitious to acquire additional highway systems, it will want to create a good reputation for honoring its maintenance obligations under the lease of the Indiana Toll Road. In Europe, which has a number of private operators of highway systems, maintenance has not been a problem, maybe because poor maintenance is quickly detected. Third is the question of checks on abuses of monopoly power. Some commenters fear the monopoly power of the lessee of the Indiana Toll Road, others argue that the state could offset it by building a parallel road. Speaking from personal experience as a frequent user of the Indiana Toll Road, it has ample capacity even at existing toll rates, which means that the construction of a competing toll road is unlikely, since it would create excess capacity, and competition under conditions of excess capacity is likely to result in prices that do not cover total costs. One comment indicates that one term of the lease is a promise by the State of Indiana not to improve certain roads that run parallel to the Indiana Toll Road, and that promise would tend to secure the lesee's monopoly and thus increase the price of the lease. As I said in my post, while monopoly pricing has misallocative effects, so do taxes, for which the revenue from the lease may be a substitute.

Comments

[Arun Khanna]

On a more fundamental level, private property is better managed and maintained than public property. Mitch Daniels is a Republican.

[Patrick R. Sullivan]

Richard Daley is a Democrat, and he led this parade by leasing Chicago's Skyway two years ago. And other Illinois Democrats are preparing to lease the remainder of their toll roads, as well as Midway Airport. The economics are so straightforward even the Dems see it.

On, 'first mover advantage', well, Good Luck. As Stan Liebowitz acidly noted in his, 'Re-Thinking the Network Economy'(chapter 3, 'Racing to be First'), it's easy to find companies that tried that strategy and are now defunct.

Ironically, the advantage was supposed to apply to high tech, not 'bricks and mortar' companies. What's more 'bricks and mortar' than highways?

[Patrick R. Sullivan]

The deal is now official, Indiana has just received its $3.8 billion. They announced that the other bids were:

Morgan Stanley... $1.9 billion

An Australian consortium... $2.84 billion

A Spanish company ... $2.5 billion.

Which means Cintra-Macquarie overpaid by almost $1 billion.

[Sam]

Private property gives the right to do with it what the owner wants, so he can maintain it better or worse to his own discretion.

[ben]

On, 'first mover advantage', well, Good Luck. As Stan Liebowitz acidly noted in his, 'Re-Thinking the Network Economy'(chapter 3, 'Racing to be First'), it's easy to find companies that tried that strategy and are now defunct.

Ummm... so what? These are private investors who think the investment is worth it. I'd bet good money they've looked into it more than you or me. I don't think personal disbelief is grounds for, well, anything, including judgments on the merits of this bid.

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