Andrew Martin is a new Strong Towns member sharing today's guest article about a road funding analogy. 


Our current system of road funding consists of fuel taxes and vehicle licensing fees. However, these fall way short of actually covering road and highway spending and are, therefore, supplemented by debt and income taxes. This redistribution of how funds are raised distorts drivers’ demand for roads and highways and leads to overconsumption. Let me explain it with an analogy.

The Party Analogy

Imagine you are at a fancy event with 99 other people. There's a bar there that serves pints of beer for $10 apiece. You like beer. In fact (for the sake for the sake of this example), you and everyone else in attendance at the event enjoy beer exactly as is shown in the following table.

(Note: In the above table, Quantity is the amount of beers consumed, Marginal Value is the value you gain from each additional beer, Total Value is the total value of all the beers you've consumed, Total Cost is the total amount spent on beer in dollars, and the Surplus is Total Value minus the Total Cost.)

It's a successful event, you end up enjoying two beers for $20 total and everyone walks away happy. You could have gotten a third beer, but its marginal value to you was less than ten dollars, so that was why you stopped at two. Alternatively, it could be stated that you stopped at two, since that was where you maximized your surplus.

Now imagine instead that at the beginning of the event, the host had proclaimed that it would be impractical for everyone to pay for their beers when they got them. Instead, the bartender would keep track of how many beers are ordered in total throughout the evening. Then at the end, the tab would be split evenly among the attendees. Being a rational person, and remembering that there are 100 people at the event, you realize that each beer that you get only costs you ten extra cents. Here’s the same table as before, but with updated total cost and surplus figures.

beer-1218742_1920.jpg

In this case, you drink seven beers. You could have gotten an eighth, but its marginal value to you, since you're already very drunk, is less than ten cents. It's a rowdy evening, but as everyone prepares to stumble home responsibly, the bartender hands each person a bill for $70. You wonder how this is possible when each beer that you drank only cost you ten cents. It suddenly hits you that each beer that everyone else drank also cost you ten cents and, as it turns out, each of the 100 attendees drank seven beers apiece. As a result many more beers were drunk, and everyone was much worse off than if they had just paid for their beers themselves. That surplus of $39.95 that you thought you had is actually a loss of $29.35.

Unfortunately, it gets worse. Let’s say you realized as the night started that if everyone drank seven beers apiece, you would lose out big time, so you decide to drink only the two beers that would make you the happiest if everyone were paying separately. Regrettably, you are unable to convince others to do the same. So, by the end of the night, 695 beers have been consumed. Your two beers gave you a value of $28, but your bill of $69.50 means that you’ve suffered a loss of $41.50. This is actually worse for you than if you had consumed a full seven beers, but you did manage to save everyone else 50 cents. Maybe you should have just stayed home.

Breaking Down the Analogy

The analogy is, of course, that beers are like roads. Drivers log more miles and demand more highways than they would if they paid for such infrastructure directly. The way the system is set up incentivizes them to do so. To make this less complex, let’s reduce the number of attendees at the event down to just you and the host, but where you still split the bill at the end. The marginal value of each additional beer is the same as before, but the marginal cost to you is $5, since the $10 true cost is split between two people.

You can see that both you and the host are incentivized to drink three beers apiece, even though that makes you collectively worse off than if you both had limited yourselves to only two beers apiece. This is a slightly extended version of the classic prisoner’s dilemma from game theory, whereby individuals are incentivized to act against their collective best interest. The dilemma can be partially overcome if the participants collude, but that becomes practically impossible with larger number of players, as the incentive for “cheating” grows. The only other way is to change the system.

Returning to roads, yes, fuel taxes and registration fees do change the numbers somewhat. For instance, attendees wanting to drink may pay a $20 cover, which would represent a registration fee, and this money would be subtracted from the final overall bill. Or, the bartender could charge $4 for each drink when a patron orders it, like a fuel tax, and only the other $6 would be totaled and divided at the end. The bill could even be divided so that those who sat at better tables pay more, like an income tax.

However, for the sake of brevity I will spare such more complex examples, leaving them as an exercise for the reader, since the underlying concept and conclusions are the same. Under our current system, cities subsidize suburbs, non-drivers subsidize drivers, and we have built much more automobile infrastructure than is useful. Only a fundamentally different model of road and highway funding can break us out of this prisoner’s dilemma.

(Top photo from CAFNR)


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About the author

Andrew Martin is a Midwestern native who became interested in architecture and urbanism while watching his Rust Belt hometown hollow out. Now living car-free in the Washington, DC area, Andrew is a civil engineer with a federal agency. He also develops energy-efficiency software. His long-term goal is to become a builder of infill townhouses with alley-facing accessory dwelling units.