Daily Archives: January 23, 2014

Can Public Services Be Profitable?

Via Dennis Griffith, we have this detailed write-up discussing what type of good transit is (in economic terms). To summarize, goods can be private, common, club, or public. The differences lie in if the good is excludable and rivalrous. A good is excludable if its consumption by those who haven’t paid for it can be prevented. For example, flying is excludable because it’s easy to prevent unauthorized use of an airplane. Air is non-excludable because you can’t stop people from breathing. A good is rivalrous if one person’s use prevents another person from using it. For example, if I catch a fish, you can’t catch the same fish. But if I ride an uncongested bus, you can ride too, and our consumption of transit is not mutually detrimental. Here’s a summary of the four types of goods and examples of each.


In this framework, transportation facilities like rail lines and freeways are properly a club good if the facility is below capacity, and a private good if at capacity. Indeed, airlines and airports are operated as private goods, and in many parts of the world, railroads and freeways are as well. So it’s clear transportation can be profitable.

However, if you choose to provide transit as a public good – that is, you make it a social good – it doesn’t make sense to ask if it’s profitable. You can measure system performance by things like boardings per mile, mode share, and reliability. You can measure financial performance by things like cost per vehicle revenue mile or cost per passenger mile. But profitability doesn’t make sense – in fact, in the context of a public good, it’s meaningless.

Consider a police department. It collects little in the way of user fees, and the user fees it does collect (seizure of assets of drug lords) have a terrible incentive structure. Is the police department unprofitable? Should its services that do not result in lucrative property seizure be cut back? On the other hand, consider the Franchise Tax Board. It collects more revenue that it takes to operate. Is it profitable in any meaningful sense?

In other words, anything below the total revenues and total expenditures of the government is just a matter of accounting. A transit agency is just a part of the government to which we’ve assigned provision of certain services and collection of certain revenues. You pay some taxes for the service to exist, then you pay additional taxes (fares) to use it – no different than, say, national parks, for which we pay taxes in general and then pay additional entrance fees when we visit.

The difference is that the other things I’ve mentioned – police, revenue collection, parks – are more naturally public services than transportation, so you don’t think about them the same way. It’s clear from past US experience and current international practices that some transportation can be operated as private goods. I don’t have a problem with that model, but if we want to pursue it, some transit agency functions that would not be profitable will have to be reassigned to other agencies. For example, society has decided that disabled people ought to be able to get around, and transit agencies have been assigned that task. But there’s no reason it couldn’t be assigned to other agencies that provide health services. Those are the types of questions that have to be answered if we want to move toward privatizing some services.

I’m off into the realm of speculation here, but I think that if you expect privatization to solve many of our transportation problems, you’re going to be disappointed. The places in the world that have high quality private transportation – Japan, Spain, France – are also pretty competent at building and operating public infrastructure. Meanwhile, other than the freight railroads, the limited data we have on private rail and highways in the US is mixed. Commuter rail services operated by concession, like Metrolink or the MBCR, are not appreciably better than directly-operated services like LIRR or Metro North. Privately operated toll roads are sometimes unable to meet revenue expectations (the 73, the 241, and the 125 in CA, and the SR-130 in Texas); when they are successful (the 91) political pressure results in public takeover.

In other words, as is often the case, for both public and private entities, there’s no solution quite so good as basic competence.