Why aren't there more private roads?

[tolbiny]

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It causes a productivity loss compared to if the monopoly is abolished.

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Efficiency is not a static model, if one could predict and quantify the outcomes of these actions accurately then you would have a strong argument for central planning from an efficiency standpoint, whereby the state could produce goods and sell them at cost to consumers getting rid of all the "waste" that is profit. Unfortunately (or fortunately for lovers of liberty) profits work not just as rewards for those who receive them but as measuring sticks to view who is providing for consumers better and as encouragement for other entrepreneurs to invest in the same industry (or a warning to stay away). Groups can make high profits from industries which encompass what you are calling "natural monopolies" because clean water, roads, whatever are highly valued by consumers. The high profits signal others to invest money into that industry satisfying more and more consumers. Artificially limiting profits artificially restricts the amount of money directed into these markets which slows/prevents further invention and innovation which prevents future gains in efficiency.

[Arnfinn Madsen]

You haven't really understood the logic of maximisation of profit in this regard, thus your whole reasoning is completely flawed (prices adjusted to clarify):

Scenario 1: Demand is in place from A to B, some drivers are willing to pay $500/passing, some $180, some $40, some $20 etc.. Company A builds a road. The company owning the road conducts a calculation, they i.e. put the price at $100/passing. Letting the 1,000 John Smiths that is willing to pay $90/passing drive will give them $90k more but they will lose more than $90k from the drivers that are willing to pay $100+ by lowering the price.

Then the bosses at company B sits down to consider if they should build a new road. Then they conduct a revenue analysis of the situation which will occur if they build a 2nd road:
Scenario 2 (two roads in place): Company A will start at $100. company B will then offer a price of $90, all the drivers will change to road B. Company A will then lower to $80 etc.. When there are two roads they will keep underbidding eachother as the most expensive one won't have customers and thus will not consider the loss of profit from the customers willing to pay high prices like $500/passing. At one point total revenue will be lower than the total cost of building the 2 roads. But it won't stop there, those are sunk cost, they will still have an incentive to underbid eachother until they come down to maintenance price at i.e. $5/passing.

So the investment manager at the 2nd company, concludes that all the investment will be lost if they build a second road.


Then lets say that company A is restricted to 500,000 passings/year. Then company B knows that if they build a 2nd road the underbidding is going to stop much earlier. Let's say at a market price of $45 there will be 1 million passings/year and that covers investment. Then they know that if they build a 2nd road, their investment will pay off.

So now we have a price of $45/passing instead of $100/passing. Those passings conducted by people willing to pay between $45 and $100 increases economic activity. Of course you have to subtract the cost of the new road, but you can still in many situations end up with a net positive economic effect.

Or, the government can ban all road building, build the road and offer the service for i.e. $35 and 1,3 mill passings/year will take place. If this is done efficiently you avoid the cost of building the 2nd road. Of course now though you add some new costs due to government inefficiency.


So to conclude, for different products there will be different alternatives that will be best for the economy. For most it will be non-intervention, but for certain ones intervention will lead to a net benefit to the economy as a whole.

[Arnfinn Madsen]

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The problem with this is that point B (where the road is traveling to) has to be a monopoly of some sort in and of its self. The fact that X people don't want to pay Y toll to get to point B is not sufficient for the road to point B being a natural monopoly, point B must not have any competition from points C D and E either (otherwise roads will be provided for those unable to afford the toll to the other points, then making points C D and E relatively more desirable compared to B than they previously were).

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Yes, but there is often a lack of good substitutes for B. This is why these situations happen.

[Arnfinn Madsen]

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It causes a productivity loss compared to if the monopoly is abolished.

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Efficiency is not a static model, if one could predict and quantify the outcomes of these actions accurately then you would have a strong argument for central planning from an efficiency standpoint, whereby the state could produce goods and sell them at cost to consumers getting rid of all the "waste" that is profit. Unfortunately (or fortunately for lovers of liberty) profits work not just as rewards for those who receive them but as measuring sticks to view who is providing for consumers better and as encouragement for other entrepreneurs to invest in the same industry (or a warning to stay away). Groups can make high profits from industries which encompass what you are calling "natural monopolies" because clean water, roads, whatever are highly valued by consumers. The high profits signal others to invest money into that industry satisfying more and more consumers. Artificially limiting profits artificially restricts the amount of money directed into these markets which slows/prevents further invention and innovation which prevents future gains in efficiency.

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I completely agree to this being true in most regards, I am just trying to show one of the exceptions, where investments will not be conducted by competitors even if the existing provider nets a high profit. The invisible hand does not always work.

[pvn]

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You haven't really understood the logic of maximisation of profit in this regard,

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No, I understand it, it's just that your example didn't actually show what you claimed it would show (you didn't pull enough numbers out of your ass) and on top of that, $$$ is not the highest goal in my book.

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Scenario 1: Demand is in place from A to B, some drivers are willing to pay $500/passing, some $180, some $40, some $20 etc.. Company A builds a road. The company owning the road conducts a calculation, they i.e. put the price at $100/passing. Letting the 1,000 John Smiths that is willing to pay $90/passing drive will give them $90k more but they will lose more than $90k from the drivers that are willing to pay $100+ by lowering the price.

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Possibly, but you didn't show that. We don't know how many are currently using the road. Also, we don't know what the capacity is.

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Then the bosses at company B sits down to consider if they should build a new road. Then they conduct a revenue analysis of the situation which will occur if they build a 2nd road:
Scenario 2 (two roads in place): Company A will start at $100. company B will then offer a price of $90, all the drivers will change to road B. Company A will then lower to $80 etc.. When there are two roads they will keep underbidding eachother as the most expensive one won't have customers and thus will not consider the loss of profit from the customers willing to pay high prices like $500/passing. At one point total revenue will be lower than the total cost of building the 2 roads. But it won't stop there, those are sunk cost, they will still have an incentive to underbid eachother until they come down to maintenance price at i.e. $5/passing.

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You're just repeating yourself.

There's no reason the price for both roads has to go to "maintenance price". You've neglected that a road has a certain capacity. And the bigger the road, the higher that mainenance price will be. On the other hand, the smaller the road, the fewer cars it can handle, and the more unmet capacity will be available no matter *how low* the price of the first road is. You can probably pull a few more numbers out of your ass here.

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So the investment manager at the 2nd company, concludes that all the investment will be lost if they build a second road.

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Then disney figures out they can build their own road, let their customers use it for free, and nobody uses road A, disney gets a bunch of happy customers.

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So to conclude, for different products there will be different alternatives that will be best for the economy. For most it will be non-intervention, but for certain ones intervention will lead to a net benefit to the economy as a whole.

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Right, now all you have to do is invent the "benefit measuring machine" that reads everyone's minds, calculates their utility, and figures out how to add those across people. There's probably a nobel prize in it somewhere.

[Arnfinn Madsen]

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You've neglected that a road has a certain capacity. And the bigger the road, the higher that mainenance price will be.

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No, I did not ignore that, I wrote:

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A natural monopoly is caused by economics of scale. It is typical for products that have a high cost for the first produced unit and low cost for the marginal produced unit.

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I also mentioned that it was more likely if physical features like passing rivers of mountains and rivers were in place. If the added investment cost or maintenance cost caused by additional passings is relatively high, then my whole example collapses.

[Arnfinn Madsen]

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So the investment manager at the 2nd company, concludes that all the investment will be lost if they build a second road.

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Then disney figures out they can build their own road, let their customers use it for free, and nobody uses road A, disney gets a bunch of happy customers.


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If the buyers can easily cooperate them between, then this happens. But cooperation has transaction costs. In this case Disney has a way to keep that cost low, but that case does not always exist. You can't keep mentioning conditions that only apply to a situation where there isn't a natural monopoly as that isn't what we are discussing.

[pvn]

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You've neglected that a road has a certain capacity. And the bigger the road, the higher that mainenance price will be.

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No, I did not ignore that, I wrote:

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A natural monopoly is caused by economics of scale. It is typical for products that have a high cost for the first produced unit and low cost for the marginal produced unit.

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I also mentioned that it was more likely if physical features like passing rivers of mountains and rivers were in place. If the added investment cost or maintenance cost caused by additional passings is relatively high, then my whole example collapses.

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It would be more accurate to say that unless the added investment cost or maintenance cost is relatively low, your example collapses. Because the vast majority of the time that's going to be the outcome. The fact that you can make up some numbers doesn't actually show anything. I can make up numbers for the density of the sun that would demonstrate that it should collapse into a black hole, however, it will not do so just because I make such numbers up.

Further, making up such numbers doesn't give me a license or a justification for engaging in aggressive, coercive behavior.

[Arnfinn Madsen]

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It would be more accurate to say that unless the added investment cost or maintenance cost is relatively low, your example collapses. Because the vast majority of the time that's going to be the outcome.

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Agreed.

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The fact that you can make up some numbers doesn't actually show anything. I can make up numbers for the density of the sun that would demonstrate that it should collapse into a black hole, however, it will not do so just because I make such numbers up.

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No, of course not. But I am not creating a teoretical scenario, most economists that study reality conclude that such situations exist.

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Further, making up such numbers doesn't give me a license or a justification for engaging in aggressive, coercive behavior.

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That's a whole different discussion.

[pvn]

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Further, making up such numbers doesn't give me a license or a justification for engaging in aggressive, coercive behavior.

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That's a whole different discussion.

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NT RLY. You asked about solutions to these problems. So far, I haven't been convinced that there's a problem, and all of the solutions to these quasi-problems have involved aggressive, coercive behavior.