The other day I got into a conversation about whether or not motorways should have tolls. This was in response to the planned imposition of tolls on the M5. My position was that, while there may be many reasons to oppose this new toll specifically, we should not be opposed to tolls in principle.
My argument rested on a particular premise – that not having a toll on a motorway was equivalent to a subsidy. I failed to convince anyone else of this proposition, and so the rest of my argument made no sense.
The question comes down to a basic idea in economics: opportunity cost. The idea is to think of economic gains and losses as being relative to the different possible alternatives.
To give a very simple example, say you have two options, A and B. If you choose A you will get $200 and if you choose B you will only get $100, everything else remains the same. If I asked how much better off you would be if you chose B, many people would say, well you’re $100 better off. But you are actually $100 worse off since your alternative was option A where you got $200.
This idea is vital when analysing any kind of economic question.
Another example: say the government happens to own a house and say the going market rent for such a house is $500 per week. The government could just let the house for that amount as a source of revenue. Or perhaps the government is concerned about people struggling with the cost of housing. So they could choose a low-income family and let the house to them at a reduced rate of rent, say $200 a week. We can see here that the difference between the market rate for the house and the rate charged by the government ($300/week) is an implicit subsidy. While the government doesn’t actually hand over any cash to the family, the government is still $300 a week worse off than it would have been and the family is $300 a week better off, compared with the situation where the house is let at the market rate.
So now we come to the motorway. A motorway is an expensive capital asset, usually costing billions of dollars. It provides a direct benefit to the people who use it in the form of (hopefully) faster trips. Tolls capture some of that benefit to cover the cost (including the opportunity cost) of the investment. Without a toll there is an implicit subsidy that is being shared amongst every resident of the state.
If we were worried about people who can’t afford it having to pay too much in tolls, we could have refunds for low-income motorists, or caps on a certain amount of tolls in a week, or oblige employers to cover some transportation costs and so on. Or we could remove the toll entirely. But to make a sensible decision on the issue we must first be aware that the no-toll scenario is not the natural or default state.
There’s a lot more to say about this issue. But maybe – if I haven’t confused things too much already – I’ve at least started you thinking about economic questions in a different way.