The Privatization of Roads and Highways - Ludwig von Mises Institute

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Public Goods and Externalities:
The Case of Roads *
When government monopolization of the roadways is
discussed by economists, the “externalities” argument
is usually raised. The argument is said to be simple,
clear, and irrefutable. In fact, none of these terms really applies.
Let us consider the argument closely.
The externalities argument is based upon a distinction
between private goods and services, the use of which benefits
only the consumer in question, and public or collective goods,
consumption of which necessarily affects the welfare of third or
“external” parties. For example, externalities are said to exist
when Mr. A. paints his house and neighboring householders benefit
as a result. 1 House painting is contrasted with completely
*This chapter was first published as “Public Goods and Externalities: The
Case of Roads,” Journal of Libertarian Studies 7, no. 1 (Spring, 1983): 1–34.
The author wishes to express his gratitude to Charles G. Koch and Edward
H. Crane III of the Cato Institute, without whose efforts this work could not
have been undertaken, and to Brian Summers of the Foundation for Economic
Education for helpful suggestions.
1Externalities are usually separated into external economies (positive
externalities) and external diseconomies (negative externalities). Although
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