Knowledge And Decisions

Similar political considerations cause the federally financed highway system “to contain a large mileage of lightly utilized freeway, especially in the plains states, whereas the investment would have given society a greater return in the more populous areas of the country.”²⁶ Again, the point is not simply its inconsistency as economic optimizing, but its perfect consistency as political optimizing. A more basic question might be why anyone would expect economic optimizing by people chosen politically, and operating under political incentives and constraints. Vague personifications of “society” and projections of government into that role may be the explanation.

Cross-subsidy is so widespread and so deeply ingrained in government controlled enterprises that a special term of opprobrium is used to describe the disturbance of such schemes by new firms entering to serve the previously overcharged segment of the market: “cream skimming.” Thus, when the United Parcel Service began delivering more packages — more cheaply, quickly, and safely than the Post Office — it was charged with skimming the cream of the market by serving urban and suburban areas rather than all the remote areas which are served by the Post Office. A private business has no incentives to subsidize one set of customers at the expense of another. Its individual incentive is to produce the maximum value at the least cost (the difference being its profit), and systemically that means getting the most possible from given resources at the least sacrifices of alternative uses of those resources.

An uncontrolled, competitive market for package deliveries would not mean that people in remote areas would have no packages delivered. It means that the frequency of such deliveries would be less, reflecting the higher cost. Those people in such areas who are able to stop by a post office or parcel service office in town during shopping trips, or when going to or from work, would pick up packages then rather than pay postage reflecting their true cost of delivery. There would also be some incremental substitution of local products for products shipped in. By contrast with market-induced economizing on the use of costly resources, a government enterprise whose residual claimants (taxpayers) are not its decision makers has an incentive to maximize its size and budget by extending the “need” for its service as far as possible — even when increasing incremental costs are greater than the incremental value to the customers. Considering the lack of incentives for internal efficiency in a tax supported organization, it is also possible that all users of the service — in remote areas as well as large cities — pay more for mail delivered by the government than they would under private management, constrained by profit and loss considerations.

Airports sell monopoly rights to a taxi company, a restaurant, gift shops, and other concessionaires and use the proceeds to subsidize the prices they charge to planes for landing at the airport. Thus, even though economists estimate the cost of a landing at Kennedy Airport during the peak hours at about $2,000, the plane pays only $75.²⁷ Distorting the knowledge of the true cost of the plane’s landing this way means that the airlines make their decisions as if landing at Kennedy Airport is far cheaper to the economy than it really is. A given airline will, for example, fly numerous planes from a given city into Kennedy Airport at various times during the day — these planes sometimes carrying only a fifth or a tenth of the passengers that the seating capacity will hold. In addition, other airlines serving the same city will fly other planes in at similar times, with similarly few passengers per plane. The net result is an inflated “need” for airport facilities — calling (politically) for expansion of given airports and/or the construction of new and expensive airports. Cross-subsidy thus creates a “need” for a larger empire of staff, facilities, and appropriations, whether the particular governmental enterprise is an airport, a postal system, or whatever.