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.