The Engineer, the Economist, and the Infrastructure Problem

A Comedy in One Scene

by Gavin R. Putland, June 3, 2005

Characters:

The NARRATOR
The KING
The ENGINEER
The ECONOMIST
Other wise men (non-speaking).

[There is no action. On radio, the other wise men are not needed. On stage, the actors playing the other wise men need not know the script.]

Scene: A throne room

The king, the engineer, the economist, other wise men.

[Enter NARRATOR to one side, in front of closed curtain.]

NARRATOR: Once upon a time, in a land far away, there was a city so beautiful and so prosperous that all who heard of it wanted to dwell therein. Thus the city grew and grew, till the roads thereof were choked, and the people thereof spent almost as much time driving as working. So the king of that land summoned his wise men, and took counsel on what should be done.

[Curtain begins to open.]

KING: Speak freely…

NARRATOR: …said the king.

KING: I shall listen and decide.

[Curtain continues to open.]

NARRATOR: The first to answer was a engineer. [Exit.]

ENGINEER: We need buses, my liege. A small bus replaces ten or fifteen cars; a large one twenty or forty cars. Wherefore, let large buses carry passengers on the most-used roads, and let smaller buses carry passengers on the more numerous, less-used roads that branch off the most-used roads. The delays caused by stopping and changing of buses would be much less than those now caused by too many cars.

KING: So the buses would use the existing roads. But how would my subjects pay for the buses and bus stops, and the maintenance thereof, and the wages of the drivers? [Pause.] What says my economist?

ECONOMIST: User pays, Your Majesty! Let the city be divided into zones, and let each passenger pay a fare depending on the number of zones traversed by the journey.

ENGINEER: Sire, if the cost be defrayed solely by fares, the fares will be high, so patronage will be low, so bus services will be infrequent, so patronage will be lower; in short, the people will keep using their cars. Moreover, the benefit of the bus service as measured by the market will be the total price that people are willing pay for access to the service, net of fares; that is, it will be the influence of the buses on land values in areas served by the buses, or by roads from which traffic is drawn away by the buses. The land owners will gain whether they use the buses or not, while tenants who use the buses will pay twice — once through their fares and once through their rents. Therefore, I counsel, let the buses be free of fares, except perhaps at peak times, and let the cost be defrayed by an annual tax on the uplift in real land values, so that Your Majesty’s subjects will contribute in proportion to benefits received. Not “user pays”, but “beneficiary pays”.

ECONOMIST: That’s an outrage, Sire! It would compel Your Majesty’s subjects to pay for the bus service whether they use it or not!

ENGINEER: Only if they be beneficiaries, my liege. Besides, if they pay for the service whether they use it or not, they will be persuaded to use it.

ECONOMIST: But property owners will be ruined! Your Majesty’s subjects will be forced out of their homes because they will be unable to pay the taxes!

KING: Property owners “ruined” because their assets increase in value? Interesting concept.

ENGINEER [bowing his head]: Indeed, my liege. In the first place, if the annual tax on each site be proportional to the increase in its market value since the tax was introduced, then the tax does not rise unless the market value rises, and the market value does not rise unless, in the judgment of the market, the owner is better off in spite of the additional tax. And the tax makes possible the very things that cause the uplift in the site value. In short, the owner cannot lose. In the second place, I do not envisage that ordinary home owners be billed for the uplift tax; rather, I counsel that the tax be deducted from, and limited to, their social security benefits.

ECONOMIST: Iniquitous, Your Majesty! Then some home owners will finance their retirements by reverse-mortgaging the homes that should be passed on unencumbered to their heirs…

KING: I wasn’t aware that the purpose of social security was to subsidize inheritances!

ECONOMIST [bowing]: Of course not, Sire. But… how does the engineer know that his “uplift tax” will cover the cost of the bus service?

ENGINEER: Your Majesty, no bus service — indeed, no public utility of any kind — should proceed unless the benefit exceeds the cost, in which case the cost can be defrayed by reclaiming only part of the benefit through the tax on the uplift in land values, leaving the rest of the benefit as a windfall for property owners.

ECONOMIST: But, my liege, much of the cost will be a lump-sum, whereas an uplift tax is an annuity.

ENGINEER: So is the income from fares, Your Majesty. Besides, as the economist will undoubtedly confirm, a lump-sum can be converted to an annuity by borrowing. In summary, if a project cannot be funded by the mechanism that I propose, it should not proceed at all.

ECONOMIST: But the mechanism is outrageous, Sire! It obliges property owners to pay for benefits to which they have not agreed. Would your Majesty’s law of contracts ever recognize such an obligation?

ENGINEER: Sire, the two defining features of taxation are that the obligation to pay is imposed unilaterally, not contractually, and that the payer is not consulted on how the payment is spent.

ECONOMIST: But when Your Majesty imposes taxes on items of everyday consumption, at least the people can avoid the taxes by not consuming those items.

KING: I wasn’t aware that I imposed taxes in order that the people might avoid them! [Pause.] Besides, can’t one more easily avoid a tax on land by selling the land?

ENGINEER: Yes, Your Majesty, but with one important difference. When a site subject to taxation is sold, someone else pays the tax. The revenue is not lost.

KING [wide-eyed]: A wonderfully simple insight! [Pause.] Nevertheless, my economist apparently thinks it were better to subsidize the bus service by increasing consumption taxes than by taxing uplifts in land values.

ECONOMIST: If indeed the bus service must be subsidized: yes, my liege.

KING: So those of my subjects whose homes are least favored by the bus service must still pay the full increase in consumption taxes. For what do they pay?

ECONOMIST: For a fair chance that their homes could have been more favored by the bus service, Sire.

KING: [Pause.] I see. And those whose homes are most favored will get unearned windfalls?

ECONOMIST: Not exactly “unearned”, Sire. Given perfect competition, zero transaction costs, zero information costs, rational expectations, and efficient capital markets, the chance of getting the windfall will have been fairly compensated in the historical cost of acquisition of each property.

KING: And if the windfall does not eventuate?

ECONOMIST: Then, my liege, the chance of not getting the windfall will have been fairly compensated in the historical cost of acquisition of each property.

KING: But how can the winners and the losers both have been treated fairly? Haven’t the winners received an unfair advantage, or the losers an unfair disadvantage, or both?

ECONOMIST [importunately]: Not if they are winners and losers in a fair gamble, Sire.

KING: [Pause.] Hmmm. And what of those who rent their homes? As they own no property whose value can be enhanced by the bus service, and as they will pay higher rents if the locations in which they live be favored by the service, why must they also pay higher consumption taxes?

ECONOMIST: …They may be owners some day, my liege.

ENGINEER: In which case, Your Majesty, the bus service will increase the prices of their new homes, so they will pay for the service yet again. But in defense of the economist, I notice that he never actually agreed that the service should be subsidized.

KING [placated]: Very well: how would my economist encourage patronage of the bus service without subsidizing it?

ECONOMIST: By a PPP, Sire — that is, a Public-Private Partnership.

KING: The name suggests… that the public sector provides the service, while the private sector covers the cost by giving back part of the uplift in land values. Presumably that is not what you had in mind.

ECONOMIST: No, my liege. Rather, I envisage that a private contractor will BOOT the project, where BOOT is an acronym for Build, Own, Operate, and Transfer — that is, build the system, own it and operate it for a period of, say, 40 years, and then transfer it to the State without compensation. There is no public expense.

KING: And no public revenue. But how does that encourage people to use the service?

ECONOMIST: With lower fares, my liege.

KING: Why? Where are the savings?

ECONOMIST: Private employers absolve Your Majesty of any responsibility for the wages and conditions of workers, so the workers can be paid less. Private contractors also dissociate Your Majesty from the quality of equipment and service, allowing the quality to be merely adequate — not, as we say, “gold-plated”.

ENGINEER: To the contrary, Sire, the public sector can borrow at lower interest than the private sector, and does not need to make a profit — let alone pay dividends.

ECONOMIST: Sire, the private sector can borrow at equally low interest with the benefit of a public guarantee. That is the public part of the public-private partnership.

KING: But didn’t you say that the BOOT arrangement avoids public expense?

ECONOMIST: A guarantee is not an expense, my liege, but only the risk of an expense. And the risk can be virtually eliminated by protecting the principal contractor from competition during the term of private ownership. For example, in the case of a bus service, there would be no permitted competition from new railways or tramways. That is another public contribution to the partnership.

KING: And another benefit for the private partner! So perhaps my economist can explain this: If public ownership of an asset were bad during the proposed term of a BOOT contract, why is it good after the term expires?

[Pause.]

KING: Speak, varlet!

ECONOMIST: Because by then the asset may have become a liability, my liege.

ENGINEER: Sire, if I may intercede for the learned economist, his opinions have necessarily concerned the funding of a bus service, because he has never been asked whether he would recommend a bus service in the first place.

KING: And would he?

ECONOMIST: Indeed not, my liege.

KING: Then what would he recommend?

ECONOMIST: Tollways, Your Majesty: multi-laned motorways with minimal bends and fast speed limits, passing over or under existing streets, linked thereto by entry and exit ramps, and funded by tolls.

KING: Why wouldn’t the tolls discourage use of the new motorways, thus defeating their purpose?

ECONOMIST: The tolls would be minimized… uh…

KING: By BOOT contracts?

ECONOMIST [hesitant]: Yes, my liege.

KING: Changing the subject, I fear that the motorways would encourage more use of cars, hence more smog. How would you avoid that?

ECONOMIST [relieved]: Oh! With tradeable emission rights, Your Majesty. Let each existing car owner be issued with a license to emit smog, and let the licenses be tradeable but fixed in number. As the demand for transport rises, the licenses will rise in price and will be held by those who value them most. That is the most efficient allocation.

KING: So those who emitted smog in the past are rewarded with a license to keep doing it, while those who refrained are punished by denying them a license? Why, this is a marvel! I have sat in judgment on so many robbers, and not one of them ever argued in his defense that having lived by robbery in the past, he had thereby acquired a license to keep robbing. I sentenced another of those worthies only yesterday. He would have engaged you instead instead of his lawyer, had he kept his head while all about him were losing theirs!

ECONOMIST [smiling and bowing]: Moreover, Sire, emission rights can be bought in order to suppress emissions.

KING: A pretty paradox! Who would buy a right to emit, in order not to emit?

ECONOMIST: The emission rights market is like the land market, my liege. Just as the ownership of a piece of land does not oblige one to use the land, so the ownership of an emission right does not oblige one to emit. Just as the people can stop the opening of a bawdy-house in their suburb by purchasing the site of the proposed bawdy-house, so they can stop other people from emitting by purchasing their rights to emit.

KING: And thereby purchase their own rights to breathe clean air. Ingenious!

ECONOMIST [bowing lower]: The choice is theirs, my liege. That is the democracy of the market!

KING: The what?

[Curtain begins to close.]

ECONOMIST [with a long crescendo]: Democracy, Sire. One dollar: one vote. Compare this with the dictatorial approach of the engineer, who would impose clean air, uncluttered streets and efficient transport on all Your Majesty’s subjects whether they want it or not!

[Enter NARRATOR in front of curtain.]

NARRATOR: The king had the economist beheaded, and they all lived happily ever after. [Exit.]

The End.

https://prosper.org.au/comedy/the-engineer-the-economist-and-the-infrastructure-problem/