The Economic Naturalist I: A freeway for tourists.

Robert Frank, an economics professor at Cornell, wrote an excellent popular economics book called The Economic Naturalist.  In it he laments the myriad concepts taught in Economics 101, where students are overwhelmed with definitions and facts, yet six months after the end of the course can not solve basic problems in economics.  He fights this trend by asking students to search for counterintuitive economic phenomena in daily life and asks them to describe the phenomena and posit an explanation using fundamental economics principles.  The results are not only entertaining but instructive to the lay person.
Since I am a lay person, I figured I'd try my hand at such an observation.

Instructions:

Your space limit is five hundred words.  Many excellent papers are significantly shorter than that.  Please do not lard your essay with complex terminololgy.  Imagine yourself talking to a relative who has never had a course in economics.  The best papers are the ones that would be clearly intelligible to such a person, and typically these papers do not use any algebra or graphs.

Disclaimer: All comments in the following analysis have a high probability of being at least one of a) uninformed b) unintentionally misleading c) conflate unrelated ideas d) naive e) just false.

A Freeway in Mexico

I noticed a strange phenomenon when I was last in Mexico.  Like many tourists, I visited the stunning Mayan pyramid at Chichen Itza.  I arrived from Tulum, on a small, crowded two lane road.  The trip took approximately 3 hours.  On the way home, I noticed that there was a highway directly back to Cancun, my next destination.  The highway was impressive.  It consisted of between 4 and 6 lanes, and was in better condition than most roads with which I am familiar in the US.  More surprising was that I was nearly the only car on the road.  There were occasional tour busses and other tourists, but Mexican citizens were conspicuously absent.  After the hour and a half it took to reach Cancun, I realized why.  It turned out to be a toll road, and the toll was around $20US.  This angered me at first.  Why should such a resource be used so wastefully, only transporting foreigners able to afford the large toll?  The road could have supported many more drivers with no inconvenience to me.   Clearly an example of an inefficient market.

It was surprising at first, but isn't so much any more.  The function between the cost of the toll and the profit to the private company that ran the road may be maximized at such a high price; lowering the price enough to allow citizens to use the road may generate more fees, but also more road damage.  Moreover, the citizens may be so poor that the company would need to lower the fees so much that even the profits were smaller, regardless of the road damage.  The two-tiered society, say wealthy foreigners and citizens, makes Mexico worse off.  If the discrepancy were smaller, the company could charge less, make as much or more profit, and the economy of Mexico would be considerably strengthened.  Nationalization of the road doesn't seem to solve the problem.  Even if the road became state owned and the charges were lowered, the government would then need to repair the road out of the national budget.  A number of things could then happen.  Either the economy would generate enough new taxes to compensate for the necessary road repairs and Mexico would be better off.  Or it wouldn't and Mexico would be worse off.  The government would have the responsibility for maintaining the road, which would either fall into disrepair or the money would have to be channeled from somewhere else in the budget.  In the short run the people would be better off, but if the road fell into disrepair that improvement would slowly decrease.

One motivation for this sort of road policy may be that it is cheaper to have someone build you a road than to finance the construction yourself.  Perhaps Mexico gave the company an incentive to build the road by giving them toll rights for, say 20 years.  No matter how inequitably they manage the road, at year 20 Mexico has a first-rate road for a modest cost.  This happens in the US.  The city of Pittsburgh, where I live, announced their intention to lease the central turnpike to a company from Spain for a large upfront fee.  This fee would cover some of the state budget deficit, giving the future toll yields to the company for some period of time.

What struck me is that where in a relatively equal society everyone would benefit from a new road, in a highly unequal society, only the wealthy benefit in the short run.