One of the
most significant features of most government operations, as opposed to private
business ventures, is that payment and service are separated. When dealing with a
private business, you pay the asked price, and then you typically receive the promised
service. It is different with most government operations. Here, payment for the
‘service’ is collected coercively through the process of taxation of the
government’s subjects, and then the ‘service’ is seemingly delivered either for
free or at a subsidized rate.
This is the
feature of government operations that make many egalitarians advocates of more
government ‘services’. They seek to put some diluted form of the communist
slogan: ‘From each according to his abilities, to each according to his needs’
into action by collecting payment through progressive taxation hitting the rich
harder, and then providing ‘service’ indiscriminately to members of the
‘general public’. We may approve or
disapprove of this egalitarian aim, but in either case, there are certain consequences
of separating payment from service through government operations that must be
recognized regardless.
In order to
explore these consequences, I will use the current debates over the proposed
expansion of the city of Toronto’s government-run transit system, under the
aegis of the Toronto Transit Commission (TTC), as a case study. The situation
is this: Toronto, compared to most other cities of its size, has a pretty
minimalist subway system, with regular instances of overcrowding and many areas
of the city totally inaccessible by subway. Most Torontonians and Toronto
municipal politicians agree that Toronto’s transit system should probably be
expanded in some way; the question is, in what way and how to pay for it? Some
want more subways; some Light-Rail Transit. Some want more service in the
suburbs and other underserved areas; others want more service in the downtown
core to relieve the overcrowding. Some think taxes should be raised to pay for
it; others think that spending cuts in other areas should be enough to pay for
it. The province of Ontario’s government wants the city of Toronto’s government
to bear most of the brunt of the financing; the city of Toronto’s government
wants the province of Ontario’s government to bear most of the brunt of the
financing. In short, we have a classic political squabble, with little decisive
action on the issue foreseen in the near future.
Why, some might ask, all the political
squabbling? Can’t we just consult ‘transit experts’ on the best place to build the
new lines and the best vehicles to use, and consult ‘economic experts’ on what
the best way of financing it would be? The problem is that there is no
objective ‘best’ of any of these things for some abstract ‘general public’,
separated from the geographical positions and subjective value judgements of
individual Torontonians. Building a proper subway to the suburb of Scarborough
would be great for people and businesses situated there, but would be little
consolation to central Toronto residents forced to pay more taxes to support
this expansion. Similarly, building more lines to relieve the congestion of
central Toronto would be great for people living and working there, but would
annoy most suburb dwellers forced to pay more taxes in order to ‘pamper’ their
downtown counterparts. Building Light Rail Systems would be cheaper, but would
be a less high quality transit experience than subways and would result in more
road congestion for personal vehicle drivers. Neither is objectively better.
How about
financing, should taxes be raised or not? The answer will depend on both your
general political ideology and on the proportion of the general tax burden that
you are forced to bear. Yes, if the government collected more revenue they
could probably provide more service (at the expense of private sector services
that had been paid for with money that had not been taxed away previously), but
there must be a point when enough is enough. When the government coercively
monopolizes important sectors such as transit, education, and health care, the
question is a difficult one to answer.
There is,
however, a solution to these seemingly insurmountable problems, a solution that
no one in the mainstream media ever talks about. The solution is the
privatization of Toronto’s transit system, with the reconnection of the currently
severed link between payment and service that it would entail. Users of the TTC
do currently pay a fare, but the fare is not enough to allow the TTC to break
even with all of its monopolistic inefficiencies, let alone have money to
expand, and the government subsidizes it, thus it is a subsidized rate,
representing a partially severed link between payment and service.
Privatization would mean the following: if an entrepreneur, probably backed by
investors, predicted that he would be able to recoup the costs of building a new
transit line, along with netting a decent profit, through charging the
free-market rate for fares, the line would get built. Rather than the section
of the city with the most political clout getting the transit line, the line
would go to the section of the city whose residents or visitors are predicted
to actually be willing to pay enough to make the line profitable. The people
willing to pay for it would receive the service that they paid for, that is the
way of the free-market.
Moreover,
privatization would introduce competition into Toronto’s transit industry.
Rather than the monopolistic, subsidized TTC calling all the shots, anyone with
brains, money, and experience could enter the transit industry and compete.
Even if multiple subway lines along the exact same street wouldn’t at the
moment be feasible, surface vehicles could compete with subways from different
companies on the same street, and if the demand warranted it, subway lines
built by competing companies could be built close enough together and going
along similar enough routes to make them real competitors. The result would be
both price competition and quality/service competition, something that would be
a welcome change from the surly TTC employees, constant delays, and ever-rising
(even though subsidized heavily) fares.
There are
bound to be a few common objections to this privatization proposal, so we will
take the time to anticipate and answer them here. The first would be a worry
about a private monopoly springing up. The critic would argue that due to the
nature of the transit industry, real competition is impossible, and thus
privatization would just mean a substitution of a government monopoly for a
private monopoly, hardly a worthwhile goal. In response, yes it is true that
currently, it is probably technically infeasible for two subway lines to compete
on the very same street. It is also true that it is technically impossible for
a Wal-Mart and a Target to be in the exact same location, and it is
commercially unlikely that these two stores would exist in the same mall or
plaza due to excessive catering to a limited demand. Does that mean that these
companies are monopolists? No it doesn’t, businesses don’t have to have the
exact same features, in this case location, in order to vigorously compete with
one another.
As we saw above, private subway line
owners would be faced with the potential competition of different owners’
surface vehicles on the same street, as well as possibly from competitors’
subway lines nearby. For instance, a private owner of the Yonge Street subway
line may be the ‘monopolist of subways on Yonge Street’, but if the demand
warranted it, a competitor could build a subway line nearby, say on
Jarvis/Mount Pleasant, to effectively compete with the Yonge Street owner. If
the demand to justify another subway line wasn’t there, it quickly would be if
the Yonge Street subway owner started running his line inefficiently or
unreasonably (the main outcome people worry about from private monopolies),
which would create space for competitors to enter on nearby streets.
In addition, besides having to
compete with other subway lines that might pop up and surface vehicles, the
privatization of the transit industry would make private subway line operators
more responsive to existing forms of transit competition than the TTC currently
is. The TTC is faced with the competition of personal vehicles and taxi cabs.
However, the TTC is kept afloat by government subsidies. If they lose some
business to personal vehicles and taxi cabs, the TTC is not going to go bust;
most likely it’ll just receive more government subsidies. These subsidies would
not be available to private subway operators, which would mean that they would
have to take the competition from personal vehicles and taxi cabs far more
seriously than the TTC currently does. Thus, worries about an inefficient
private transit monopoly are unfounded; privatization would feature far more
competition in the transit industry than the current system of a
government-subsidized monopoly.
Another objection would probably have
to do with positive externalities (see my post on externalities here: http://thinkingabouthumansociety.blogspot.ca/2013/03/economic-externalities-raison-detre-for.html).
Critics would point out that the building of a subway line servicing a
neighbourhood would result in external, unpaid-for benefits to the residents
and business owners of that neighbourhood, in the form of more accessibility to
the neighbourhood and a corresponding rise in property values. The problem with
this is that because subway entrepreneurs are not remunerated for providing
these external benefits, they will not factor it in to their calculations, and
hence will be less likely to build a subway line, even if the benefits outweigh
the costs if the external benefits are taken into account.
In response, given the
possible external benefits, there are two options: either the subway line is
built or it is not built. If it is built on the strength of the anticipated consumer
demand for the transit services alone, than the external benefits just shower
on the residents of the affected neighbourhood and no one is made worse off.
Who can complain about that? If it is not built based on the strength of the
anticipated consumer demand for the transit services alone, then there are two
possibilities: either it would have been built had there been a way of ‘internalizing
the positive externalities’, or it would not have been built even if there was
a way of ‘internalizing the positive externalities’, because the benefits
simply did not outweigh the costs. The problem is that we have no way of
knowing which possibility applies to each particular case. Positive
externalities, precisely because they are externalities, are immeasurable.
Flawed surveys asking, without actually demanding the payment, how much people ‘would
have’ paid to have a subway line in their neighbourhood is not a scientific way
of ‘measuring externalities’ for the simple reason that people tend to be more
generous in words than they are when it comes time to actually open their
wallets. Because externalities are immeasurable, it is unscientific for an
observer to say that this subway line ‘should have been built if it had not
been for the selfish profit motive’: they simply have no way of knowing if the
externalities were significant enough to justify the cost.
Besides this problem with the
positive externalities argument, another problem is that it assumes that people
are too inert and apathetic to actually organize and try to ensure that the
beneficial, positive externality-showering subway line comes their way. In
reality, people can and often do organize to internalize some of the potential
positive externalities in order to ensure that the project is undertaken. For
instance, a private subway entrepreneur could be faced with the choice of
whether to build a subway line on Eglinton Avenue or on St Clair Avenue, or to
not build a new subway line at all and invest in another, more profitable,
project. Let us assume that on the strength of anticipated consumer demand for
subway transit alone on either of these streets, building either line is
anticipated to be not as profitable as other uses for the same amount of
investment money. There are potentially un-internalized positive externalities
for the property values of people on and around these streets though, what can
be done? Well, an Association for Encouraging the Eglinton Subway, for instance,
could be organized by residents and business owners near Eglinton. It could be
organized on the foundation of a contingent contract, where subscribers promise
to give a certain amount of money to the cause, provided that, say, 50% of business
owners and residents in the designated area do the same. The money could then
be offered to the subway entrepreneur as an incentive to build his line there,
thus effectively internalizing some of the positive externalities. The same
could be done by St Clair residents, and presumably whichever neighbourhood
managed to raise more money, assuming it was enough, would get the cherished
subway line. This process would be even easier if neighbourhoods, as many
probably would be in a more libertarian society, were organized on a town
house/condominium-type basis, in which case residents’ associations or ‘neighbourhood
entrepreneurs’ would already be in place to gather money from residents to improve
the infrastructure, including subway encouragement, of the neighbourhood.
Thus, as usual, the positive
externalities argument against privatization does not hold up because it mistakenly
believes that externalities are accurately measurable, mistakenly assumes that
people are inert in the face of potential positive externalities rather than voluntarily
organizing to reap them, and overestimates the ability of coercive governments
to deal with the problem satisfactorily.
Finally, as the night follows the day,
the egalitarians are bound to oppose transit privatization with their signature
argument. They would argue that transit should be something that people should
have more or less equal access to, and that being rich should not determine how
well your transit needs are met. It is for this reason that egalitarians favor
the government method of separating payment from service, and oppose
privatization with its indissoluble link between payment and service. For my
evaluation of egalitarianism in general, see section 2 of the following post: http://thinkingabouthumansociety.blogspot.ca/2013/04/dissecting-leftist-statism.html
Here, suffice it to say that while
there is nothing objectively wrong with valuing a more egalitarian societal
distribution of wealth as a good in its own right, there is something objectively
wrong with ignoring the effects of implementing egalitarian policies. Most
importantly, it must be recognized that egalitarian policies have a weakening
effect on incentives to make money by producing for the world’s consumers. In
the case of transit, the egalitarians are really saying (though most would
never put it this way) that better ability to serve the consumers, as measured
by someone’s disposable wealth/income in a free-market order, should not result
in access to a better subway line than poorer people. Transit privatization,
according to the egalitarian argument, is ‘unfair’ because the fares necessary
to actually make the business profitable might result in pricing poor people out
of the subway market. Now, we do not actually know whether fares under a
private subway system would be higher than under the auspices of a subsidized,
but also cost heavy and inefficiently run, government monopolist. Most likely
they would be at first, but would gradually get lower (forgetting about
monetary inflation for now) as the private lines got a chance to innovate and
improve their processes, spurred on by competition and the profit motive. Even
if they were perpetually higher though, all that means is that people actually
have to pay for the services that they are using and that people who have had
more success serving the consumers in other fields have more purchasing power
to purchase more and better transit services with. This is how the incentive
structure of the market works and even an intense love of egalitarianism cannot
conjure away the effects of interfering with it.
Thus, my proposed solution to the
Toronto transit political dilemma is one that is rarely ever talked about: to
take transit out of the hands of politics entirely, and return it to the market
where it can thrive. The monopoly, positive externalities, and egalitarian
objections to this proposal do not really hold up, and should certainly not be
held up as grounds for dismissing the proposal entirely without a proper
discussion of its merits.
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