1. 1/2/2019
Class 9 Network Industries, Spring, Building Infrastructure: Highways/REA
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

45. January 2, 2019
Federal Highway Act of 1921

46. 1921 Act: State designation of primary (interstate) and secondary (intercounty) highways
January 2, 2019

47. 1921 Act H. Rep. 67-162: Post WW1 Priority and Vision Conflicts
January 2, 2019

48. 1921 Act H. Rep. 67-162: Designation of Interstate System
January 2, 2019

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

50. January 2, 2019
1944 Act S. Rep

51. 1944 Act S. Rep 78-1056: Post WWII Plan
January 2, 2019

52. 1944 Act S. Rep 78-1056: Highways as a Job Program
January 2, 2019

53. 1944 Act: Designation of Interstate System
January 2, 2019

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

55. 1956 Act: Continuing Funding Allocation
January 2, 2019
1956 Act: Continuing Funding Allocation

56. 1956 Act: Interstate System
January 2, 2019
1956 Act: Interstate System

57. 1956 Act: Apportionment: 50% population based, 50% as under primary system
January 2, 2019

58. 1956 Act: Apportionment: Fed share of costs at 90 to 95%
January 2, 2019

59. Interstate Facts Federal Highway Administration
1/2/2019
Interstate Facts
Federal Highway Administration
January 2, 2019

60. January 2, 2019
REA History, April 19, 1982

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

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

63. REA History: Funding and Interest Rates
January 2, 2019

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

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

66. Grades of Telephone Service
January 2, 2019

67. January 2, 2019
Interest Rates

68. Sources of Wholesale Power
January 2, 2019

69. REA Telephone Borrower Revenue Sources
January 2, 2019

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

71. January 2, 2019
REA: Number of Systems

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

73. January 2, 2019
REA: Loan Repayment

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

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