Knowledge And Decisions

The history of American transportation, from municipal bus and streetcar lines to railroads and airlines, is a history of government-imposed cross-subsidies. Initially, municipal transit was privately owned by a number of firms operating streetcars along various routes. The creation of city-wide franchises — monopolies — was usually accompanied by fixed fares, regardless of distance traveled or transfers required. Short-distance passengers subsidized long-distance passengers. The effects were not only distributional but allocational. More resources were devoted to carrying people long distances than would have been if the true costs had been conveyed to those using the service. Therefore, the creation of suburbs and central business districts was subsidized, at the expense of people living in the city and of neighborhood enterprises. The question is not which of these residential or business arrangements is “better” in some categorical sense. The point is simply that cross-subsidy conveyed false economic information to those making decisions as to where to live or shop, and the fact that the subsidy never appeared in a government budget conveyed no information at all to the electorate.

Like most price discriminators, municipal transit was vulnerable to competitors who chose to serve the overcharged segment of their customers. Around 1914-1915, the mass production of the automobile led to the rise of owner-operated bus or taxi services costing five cents and therefore called “jitneys,” the current slang for nickels:

The jitneys were owner-operated vehicles which essentially provided a competitive market in urban transportation with the usual characteristics of rapid entry and exit, quick adaptation to changes in demand, and, in particular, excellent adaptation to peak load demands. Some 60 percent of the jitneymen were part-time operators, many of whom simply carried passengers for a nickel on trips between home and work. Consequently, cities were criss-crossed with an infinity of home-to-work routes every rush hour.

The jitneys were put down in every American city to protect the street railways and, in particular, to perpetuate the cross-subsidization of the street railways’ citywide fare structures. As a result, the public moved to automobiles as private rather than common carriers. ...¹⁹

In short, the cross-subsidy scheme not only distorted the location of homes and businesses; it artificially increased the “need” for private automobiles by forcibly preventing or restricting the sharing of cars through the market.

Ironically, years later, some municipalities have tried to encourage car pools to reduce traffic congestion, but car-pooling through nonmarket mechanisms requires far more knowledge than through the market for jitneys, and conveys far less incentive for dependability and cooperation. Because car pools are advance agreements among particular small subsets of persons, rather than a systemic arrangement for all the cars and passengers in the whole set of travelers, enormous sorting and labeling costs are involved in car-pooling — determining specifically who is going where and discovering how dependable and punctual each other person in the subset happens to be. By contrast, the jitney owner made profits by picking up people (usually on his own way to work) and had every incentive to pick them up on time every day, or some other jitney owner would pick them up before he got there. But with nonmarket car pools, a particular set of riders is waiting for a particular car — and it remains illegal for other cars to sell their services to them without a city franchise as taxis. Under these constraints, car pools have done little to relieve traffic congestion, despite much exhortation.