Some basic economic principles in the roads debate |
The needed roads should be built and no more |
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by Terry McDonough The National Roads Authority has attempted to invoke the authority of economic science in making the case for the proposed national motorway system and in defence of plans to underpay farmers for their land. Below we will see that some economic concepts are being misused whereas others are being conveniently left out of the discussion. The Market Price The representatives of the National Roads Authority have had no trouble addressing angry meetings invoking the supposedly neutral and scientific authority of the “market price” for land. One representative even went so far as to argue that just as the ordinary punter expects to pay the market price for a pint, so the NRA has no compunctions about requisitioning farmland at the market price. Leaving aside the obvious point that the price of the pint in Irish society is anything but non-political, this example illustrates the fallacy of the NRA’s argument. A pint has a single market price because it is a commodity produced through the use of other commodities. It is more or less easily reproducible at a known and relatively fixed cost. The price of the pint reflects this cost and the profits charged by the producers. In addition, as in the Murphy’s ad, one pint is much like any other. When the publican parts with the pint, its market price invariably allows him to replace that pint with one just like it should he choose to do so. If there is any abstract justice in the market price (and there is no reason it should be any more sacred than any other fallible human institution) it is this ability to replace what is taken which is at the heart of it. Even the most casual reader will have figured out by now that my next point is precisely that land taken by compulsory purchase is not at all replaceable in this sense. Land cannot be created to order. With a few exceptions what exists now will be all we have in the future. Each parcel of land exists in a unique location and has unique qualities. Each patch of land has a unique meaning to its owner and indeed to the community at large. This is why in reality there is no single market price for an acre of farmland. There is in fact no support within the economics profession for the NRA’s position on compensation for compulsory purchase. Let me explain the most conservative of the economic positions on this matter. This position would argue that when a property holder is negatively impacted by a public project, they should be made whole. This means they are entitled to just enough monetary compensation to make them indifferent between continuing unmolested on the one hand and both getting the money and living with the project on the other hand. For the individual land holder the following equation should hold: Motorway + money = no Motorway What sum of money is involved here? How much money would bring a reasonable person to this point of indifference? In the case of acquiring land for a motorway, you might start by looking at an average price recently paid for the amount of farmland you want. But this would only be a bare starting point. Next you would have to recognise that the territory you want most likely runs in a thin stripe through the middle of a farm. Further, it is in the nature of a motorway that it cuts off free access to the other side of it. Thus taking the motorway land reduces or eliminates the value of all the land on the other side of it. This must be included in the compensation. The motorway could potentially make a farm uneconomic and consequently the entire living of the farmer would need to be replaced. In cases where the work was valued for more than its monetary reward, its loss would require additional and perhaps substantial compensation. The sheer ugliness of a motorway would reduce the subjective value of the farm holding demanding further compensation. This would apply to non-farming members of the family as well. Noise and pollution problems would have to be valued and compensated. Stress, disturbance, including problems created during the construction phase would all have to be compensated. So compensation would be calculated in the following way: Value of land + Compensation for Severance + Loss of Livelihood + Loss of “visual amenity” (for all members of household) + Compensation for pollution (including health impacts) (all members of household) + Compensation for noise (all members of household) + Compensation for stress and disturbance (all members of household) Total Compensation Many of the above factors also justify compensation for those near motorways, even if land is not directly taken. An important point to take away from the above discussion is that the value is different in the case of each farm. Farm organisations should help their members fight this issue but they should not negotiate a one size fits all payment. The NRA has an obligation to negotiate with each landholder to take account of individual differences in impact. Sometimes the owner of land in the path of a motorway would realise that they held a monopoly on land needed for the road. They would have the authorities over a barrel and exaggerate the impact of the proposed motorway on the quality of their life. On the other hand, some individuals subject to compulsory purchase wouldn’t become willing sellers of their land for any price, so much do they value the farm. Consequently, it is appropriate for compensation to err on the high side if errors are to be made. Financing the Roads and Economic Benefits Granting compensation on the principles outlined above is important not only from the point of view of fairness. It also constitutes an important way of evaluating the appropriateness of the project. If the community at large is not willing to fully compensate the losers from a project then it may well not be worth doing because the losers would lose more than the benefitters, in this case motorists, would benefit. In cases where less than full compensation is paid for the disturbance and distress of the land-take, the farmer is paying a forced subsidy to the road building project. The road is being built on the cheap at less than its true cost. The existence of this kind of subsidy produces a decision-making environment where it is easier to decide to overbuild the road network. In other words the cost of much of the proposed system may well exceed the benefits. When this is the case, the economy experiences a net loss from the roads project. The question of tolling the new roads raises similar issues. If the benefits of the roads justified the costs the government should be willing to put up all the money rather than disguising part of the cost through accepting private investment which will be paid off on the never-never through tolling. Alternately, a really useful toll road should attract private finance and not need a public subsidy. The motorists would willingly pay for the entire cost in tolls in return for the convenience of the needed road. When a road needs both a public subsidy and private investment in return for tolls, the suspicion must be that the road needs multiple finance precisely because its costs exceed its benefit. Again, the economy will be worse off after all the spending on the road than it was before. “Locking In” the Motorways Too many roads are not like too many silk blouses. The road system is a sometimes necessary evil. The needed roads should be built and no more. Overbuilding roads leads to urban sprawl and increased demand for roadways leading in a vicious cycle to more urban sprawl. Increasing the capacity of the road system funnels more traffic onto the urban road system increasing rather than decreasing congestion. Rising congestion leads to demands for further roads. This self-feeding process leads to a diminished quality of life and increased pollution including failure to meet greenhouse gas targets. Economists have recently developed the concept of the “lock in” to explain the extraordinary success of systems like Microsoft even though they deliver below par services. Lock in happens when a system needs multiple customers before it becomes useful and is more useful the more customers it has. Telephones are an obvious example. The owner of the first telephone would initially have had no one to call. But the more people who installed phones the more useful that first phone became. Under these circumstances a first mover or massive investor can “lock in” the use of their product by acquiring a critical mass of users before any competition. This same process happens in the case of competing transportation systems like roads and rail. The Irish government is supposedly committed to providing both an elaborate motorway system and decent public transport through rail. But the roads are to be built first. In the face of extensive roadways and an antiquated and inadequate public transportation system, individuals will choose to rely on their own cars. Housing will be built around the road system relying on automobiles for transportation. Shopping centres will be built on highways with large parking lots. Employment will be sited on the assumption that employees drive their own cars. Businesses will be built on servicing both cars and the road system. Powerful lobbies like the Automobile Association will be created. Roads as the predominant form of transportation will be locked in. Even if a road-based and a rail-based system are built simultaneously, a similar dynamic will ensue. There are simply not enough journeys to support a dual transportation system of both elaborate roads and an extensive public transportation network. When a public transportation system loses passengers to the road system it loses money and cuts back services. Poor service leads to fewer travellers and public transit is caught in a downward spiral. The coexistence of a road-based and a public transport based system leads to the demise of public transport. The building of extensive motorways at this time will decide Ireland’s transportation well into the future. Ireland will have lost the chance to create an efficient and environmentally friendly system of transportation. Regional Development The NRA and many politicians have justified the motorway proposals as contributing to regional development. The argument is that an improved road system will bring workers into less developed areas and carry products out to wider markets. The fallacy of this argument is obvious. A more efficient road system can carry workers away from less developed areas and carry products created elsewhere in. The effect of the roads on development might be positive, but it could as easily be negative or neutral. Terry McDonough lectures in economics at NUI, Galway and is chairperson of the Moycullen Bypass Action Group. |