1/2/2019 Class 9 Network Industries, Spring, 2014 Building Infrastructure: Highways/REA Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2008-14 Randal C. Picker. All Rights Reserved.

Simple Approach to Government and Public Finance 1/2/2019 Simple Approach to Government and Public Finance Two States, One National Government What projects should we finance at what levels and why? When will we see projects switch levels and why? January 2, 2019

Types of Projects: National 1/2/2019 Types of Projects: National National Projects Benefits flow to everyone though not necessarily in equal amounts Not located in one particular jurisdiction Examples: National defense Currency January 2, 2019

N1: Good National Project 1/2/2019 N1: Good National Project Project Costs and Outcomes VPurple = 15, VPink = 15 Cost of Project: 20 Taxes: TPurple = 10, TPink = 10 January 2, 2019

N1: Good National Project 1/2/2019 N1: Good National Project Evaluation Budget balanced Overall benefits exceed costs “Fair” allocation of costs and benefits January 2, 2019

How Should We Finance the Good Project? 1/2/2019 How Should We Finance the Good Project? Possible Choices Territorial area Population Number of jurisdictions Pro rata based on value January 2, 2019

N2: A Dead Bad Project Project Costs and Outcomes 1/2/2019 N2: A Dead Bad Project Project Costs and Outcomes VPurple = 5, VPink = 5 Cost of Project: 20 Taxes: TPurple = 10, TPink = 10 January 2, 2019

N2: A Dead Bad Project Evaluation Budget balanced 1/2/2019 N2: A Dead Bad Project Evaluation Budget balanced Overall costs exceed benefits Shouldn’t expect project to go forward January 2, 2019

N3: A Live Bad Project? Project Costs and Outcomes 1/2/2019 N3: A Live Bad Project? Project Costs and Outcomes VPurple = 2, VPink = VRed = 8 Cost of Project: 21 Taxes TPurple = TPink = TRed = 7 January 2, 2019

N3: A Live Bad Project? Evaluation Budget balanced 1/2/2019 N3: A Live Bad Project? Evaluation Budget balanced Overall costs exceed benefits Pink and Red gain, Purple loses: Can Pink and Red impose will on Purple? Does level matter? January 2, 2019

N4: The Risk of Free Riding 1/2/2019 N4: The Risk of Free Riding Project Costs and Outcomes VPurple = 5, VPink = 22 Cost of Project: 20 Taxes: TPurple = ?, TPink = ? January 2, 2019

N4: The Risk of Free Riding 1/2/2019 N4: The Risk of Free Riding Evaluation Overall benefits exceed costs Pink would move forward w/o Purple: Can Purple free ride? Does level matter? January 2, 2019

Types of Projects: Local 1/2/2019 Types of Projects: Local Local Only Projects Benefits flow only locally Often located in one particular jurisdiction Examples: Local parks Local libraries Fire and police stations January 2, 2019

L1: Good Local Project Project Costs and Outcomes 1/2/2019 L1: Good Local Project Project Costs and Outcomes VPurple = 15, VPink = 15 Cost of Project: 10 each Taxes: TPurple = 10, TPink = 10 January 2, 2019

L1: Good Local Project Evaluation Budget balanced 1/2/2019 L1: Good Local Project Evaluation Budget balanced Benefits in each jurisdiction exceed costs All benefits and costs internalized January 2, 2019

L2: Bad Local Project Project Costs and Outcomes 1/2/2019 L2: Bad Local Project Project Costs and Outcomes VPurple = 5, VPink = 5 Cost of Project: 10 each Taxes: TPurple = 10, TPink = 10 January 2, 2019

L2: Bad Local Project Evaluation Budget balanced 1/2/2019 L2: Bad Local Project Evaluation Budget balanced Costs in each jurisdiction exceed benefits Neither project will go forward January 2, 2019

L3: Local Tailoring Project Costs and Outcomes VPurple = 5, VPink = 12 1/2/2019 L3: Local Tailoring Project Costs and Outcomes VPurple = 5, VPink = 12 Cost of Project: 10 each Taxes: TPurple = ?, TPink = ? January 2, 2019

L3: Local Tailoring Evaluation 1/2/2019 L3: Local Tailoring Evaluation Purple should reject project, Pink should adopt Full internalization Will Pink try to go national (claim N3)? (Spending other people’s money) January 2, 2019

L4: Local w/Tax Salience Problems 1/2/2019 L4: Local w/Tax Salience Problems Project Costs and Outcomes VPurple = 5, VPink = 5 Cost of Project: 10 each Taxes Suppose Purple believed that Pink would be taxed at 10 to pay for Purple project. Would Purple be in favor? January 2, 2019

L4: Local w/Tax Salience Problems 1/2/2019 L4: Local w/Tax Salience Problems Project Costs and Outcomes Suppose Pink believed that Purple would be taxed to pay for Pink project Would Pink be in favor? Does this cause Purple and Pink to take the project national? January 2, 2019

L4: Local w/Tax Salience Problems 1/2/2019 L4: Local w/Tax Salience Problems Benefits and Tax Salience You see the benefit of the project in your local area Are you just as aware of the taxes to pay for it? How much did you pay last year in Income taxes? Property taxes? Cell phone taxes? Gasoline taxes? January 2, 2019

Types of Projects: Local with Spillover 1/2/2019 Types of Projects: Local with Spillover Local with Spillover Benefits flow locally with some spillovers across jurisdiction Often located in one particular jurisdiction Examples: Local highways? Interstate highways? January 2, 2019

LwS: Good Project Project Costs and Outcomes V1Purple = 8, V1Pink = 4 1/2/2019 LwS: Good Project Project Costs and Outcomes V1Purple = 8, V1Pink = 4 V2Purple = 4, V2Pink = 8 Cost of Project: 10 each Taxes: TPurple = ?, TPink = ? January 2, 2019

LwS: Good Project Questions 1/2/2019 LwS: Good Project Questions Can we do these as purely local projects? Do we need to coordinate? Do we need to go national? January 2, 2019

Matching Real Life with the Hypos 1/2/2019 Matching Real Life with the Hypos Try These Situations Federal-Aid Road Act of 1916? Federal-Aid Road Act of 1956? Rural electrification in 1936? New public broadband network? January 2, 2019

Federal-Aid Road Act of 1916 1/2/2019 Federal-Aid Road Act of 1916 U.S. Constitution: Art. I, Sec 8: The Congress shall have Power … To establish Post Offices and post Roads 1916 Act seen as first major federal move into roads January 2, 2019

H. Rep. 64-26: Rural Post Roads (Jan 6, 1916) January 2, 2019

H. Rep. 64-26: Rural Post Roads (Jan 6, 1916) January 2, 2019

H. Rep. 64-26: Rural Post Roads (Jan 6, 1916) January 2, 2019 H. Rep. 64-26: Rural Post Roads (Jan 6, 1916)

S. Rep. 64-250: Rural Post Roads (Mar 10, 1916) January 2, 2019 S. Rep. 64-250: Rural Post Roads (Mar 10, 1916)

S. Rep. 64-250: The State of the Roads January 2, 2019 S. Rep. 64-250: The State of the Roads

S. Rep. 64-250: The Growth in Traffic January 2, 2019 S. Rep. 64-250: The Growth in Traffic

S. Rep. 64-250: Use Externalities January 2, 2019 S. Rep. 64-250: Use Externalities

S. Rep. 64-250: Federal Role in Canals/Harbors and Railroads January 2, 2019

S. Rep. 64-250: Role of roads in mail delivery January 2, 2019

S. Rep. 64-250: Role of roads as to military January 2, 2019

S. Rep. 64-250: Local gov’t distortions January 2, 2019 S. Rep. 64-250: Local gov’t distortions

S. Rep. 64-250: Importance of state stake January 2, 2019

Federal-Aid Road Act of 1916: Rural post roads January 2, 2019

Definition of rural post roads January 2, 2019 Definition of rural post roads

Apportionment of Funds: area, population, mail routes January 2, 2019

S. Rep. 64-250: Apportionment Factors January 2, 2019

Federal/state funding: 50/50 January 2, 2019 Federal/state funding: 50/50

January 2, 2019 Federal Highway Act of 1921

1921 Act: State designation of primary (interstate) and secondary (intercounty) highways January 2, 2019

1921 Act H. Rep. 67-162: Post WW1 Priority and Vision Conflicts January 2, 2019

1921 Act H. Rep. 67-162: Designation of Interstate System January 2, 2019

Federal-Aid Highway Act of 1944 January 2, 2019 Federal-Aid Highway Act of 1944

January 2, 2019 1944 Act S. Rep 78-1056

1944 Act S. Rep 78-1056: Post WWII Plan January 2, 2019

1944 Act S. Rep 78-1056: Highways as a Job Program January 2, 2019

1944 Act: Designation of Interstate System January 2, 2019

Federal-Aid Highway Act of 1956 January 2, 2019 Federal-Aid Highway Act of 1956

1956 Act: Continuing Funding Allocation January 2, 2019 1956 Act: Continuing Funding Allocation

1956 Act: Interstate System January 2, 2019 1956 Act: Interstate System

1956 Act: Apportionment: 50% population based, 50% as under primary system January 2, 2019

1956 Act: Apportionment: Fed share of costs at 90 to 95% January 2, 2019

Interstate Facts Federal Highway Administration 1/2/2019 Interstate Facts Federal Highway Administration http://www.fhwa.dot.gov/interstate/homepage.cfm January 2, 2019

January 2, 2019 REA History, April 19, 1982

REA History: Loan Program 1/2/2019 January 2, 2019 REA History: Loan Program

REA History: Exec Order followed by statute January 2, 2019

REA History: Funding and Interest Rates January 2, 2019

REA History: Rural telephones January 2, 2019 REA History: Rural telephones

% of Farms with Electric and Telephone Service January 2, 2019

Grades of Telephone Service January 2, 2019

January 2, 2019 Interest Rates

Sources of Wholesale Power January 2, 2019

REA Telephone Borrower Revenue Sources January 2, 2019

REA Loans and Loan Guarantees (REA, Jan, 1983) January 2, 2019

January 2, 2019 REA: Number of Systems

REA: System Organization January 2, 2019 REA: System Organization

January 2, 2019 REA: Loan Repayment

REA: Electricity Coverage January 2, 2019 REA: Electricity Coverage

REA: Telephone Coverage January 2, 2019 REA: Telephone Coverage