Economics with declining systems of infrastructure

John Schlichting .13

Economics 2001.03H-William J. White
Due 12/1/2017
 Infrastructure is integral to every economy; providing access to transportation, sanitary

water, waste disposal systems, and fundamental facilities is required for society to function. The

quality of an economies’ infrastructure determines the activity and growth available.1 “A

modern, efficient highway system is essential to meet the needs of our growing population, our

expanding economy, and our national security.”2 This statement made by Dwight D. Eisenhower

in 1955 is still relevant to the growth and infrastructure of the United States. The ability to

connect people with goods and services across vast distances efficiently and quickly has become

a standard demand of the average consumer. It is essential for countries to invest in the

maintenance and management of efficient infrastructure designs in order to cultivate an efficient

allocation of resources and a higher quality of life.3 Unfortunately, the infrastructure in the

United States has recently received a D+ evaluation from the American Society of Civil

Engineers, ASCE, describing a state of “significant deterioration approaching end of service with

a strong risk of failure”.4

This paper will attempt to describe how the decline of infrastructure quality can affect the

economy and how systems are being used to adequately design infrastructure and policy to

maximize benefits. Properly designed infrastructure allows for efficient allocation of market

resources by reducing production costs and the cost of consumption, thereby increasing

productivity, lowering prices, and developing competitive markets.5 A product can be delivered

1
Bogetic, Zeljko, and Johannes W. Fedderke. "International benchmarking of infrastructure performance
in the Southern African customs union countries." (2006).
2
Dwight D. Eisenhower: "Annual Message to the Congress on the State of the Union," January 6, 1955.
Online by Gerhard Peters and John T. Woolley, The American Presidency Project.
3
Kessides, Christine. The contributions of infrastructure to economic development: a review of
experience and policy implications. Vol. 213. World Bank Publications, 1993.
4
Blatt, Harvey. ​America's environmental report card: are we making the grade?​. MIT Press, 2011.
5
Henckel, Timo, and Warwick J. McKibbin. "The economics of infrastructure in a globalized world: issues,
lessons and future challenges." Journal of Infrastructure, Policy and Development 1, no. 2 (2017):
254-272. Harvard, pg 3
promptly and on demand, reducing time and monetary costs of transportation. Efficient

infrastructure reduces the economic burden of resource waste; less congestion means workers

spend less time commuting, communities enjoy health benefits from proper sanitation systems,

and rural parts of countries are connected to wireless networks.

Infrastructure is primarily a public good; it benefits the collective good. As such, due to

the cost and scale of these projects, most construction and maintenance of highways, national

defenses, water treatment facilities, and other national infrastructure systems is funded by taxes

allocated by the government. The commerce clause6 validates the government’s involvement in

the construction of infrastructure; without infrastructure a government becomes unable to

provide certain freedoms and access to public goods.7 Therefore, the ability to produce

infrastructure systems that balance the quality of the product, intrinsically the efficiency of the

economy, with the cost to the taxpayer is essential. Governments invest large sums of taxpayer

money into the construction of infrastructure, however these projects face an inelastic demand

curve8; therefore the creation of sustainable systems and policies that balance quality and costs is

not only difficult, it is often costly to reverse. Estimates provided by the FHWA suggest that

reconstruction of a mile of highway is about $1.8 million per mile for rural areas and $3.3

million per mile for urban areas.9 These high costs result in minute inefficiencies causing billions

of dollars of investments to go to waste.10

6
Constitution of the United States, Article 1 Section 8, Congress shall have power to lay and collect
taxes, duties, imposts, and excises, to pay the debts and provide for the common defence and general
welfare of the United States...To regulate commerce with foreign Nations and among the several States..
7
Kallhoff, Angela. 2011. Why democracy needs public goods. Lanham, Md: Lexington Books.
8
PRIMER, A. "Economics: Pricing, Demand, and Economic Efficiency."
9
Black, Alison Premo. "The 2015 US Transportation Construction Industry Profile." (2015). Pg 11
10
Henckel, Timo, and Warwick J. McKibbin. Pg 7
 For example, poor infrastructure in Latin America has created large logistics costs and an

inefficient allocation of resources that impede its economic growth and competitiveness in the

global market.11 In order to support economic growth in Latin America, 4-5% of their GDP is

required for investment into infrastructure.12 The United States faces a similar problem, the

economic cost of maintenance and repair for the National Highway System alone would require

$134 to $194 billion in infrastructure investment to maintain in a state of good repair and $189 to

$262 billion to improve and support economic growth.13 With such a large economic burden, the

current method of funding through a gasoline tax is insufficient and has caused Congress to

allocate $143 billion from other resources since 2008 in order to sustain the Highway Trust

Fund.14

The economic costs of inefficient and deteriorating infrastructure due to inadequate

investment and management can be observed in the form of congestion. Congestion can be

interpreted as when the demands of the infrastructure exceed the capacity of the system; this

causes greater quantities of fuel to be used and commuting times for the average worker.15

Based upon the infrastructure evaluation of the ASCE and other organizations, the United States

must invest in the efficient design and maintenance of infrastructure because an inability to do so

11
​Estache, Antonio, and Grégoire Garsous. "The impact of infrastructure on growth in developing
countries." ​Economics Notes​ 1 (2012).​ pg 7
12
Kohli, Harpaul Alberto, and Phillip Basil. "Requirements for infrastructure investment in Latin America
under alternate growth scenarios: 2011–2040." Global Journal of Emerging Market Economies 3, no. 1
(2011): 59-110.
13
Department of the Treasury, and Council of Economic Advisors. “A New Economic Analysis of
Infrastructure Investment” pg 20-27
14
Congressional Budget Office. “Approaches to Making Federal Highway Spending More Productive.”
(2016). pg 10-20
15
​Perks, R., and C. Raborn. "Driving and Commuter Choice in America: Expanding Transportation
Choices Can Reduce Congestion, Save Money and Cut Pollution." ​Washington, DC: Natural Resources
Defense Council(​ 2013).
will cause further deterioration and increase chances of market failures and infrastructure

collapses.

Therefore, new methods of design and construction are being developed and

implemented into the maintenance and policy of infrastructure in order to reduce congestion,

economic burden to the taxpayer, and maximize benefits from infrastructure. Currently, the

majority of infrastructure funding comes from property, sales, and fuel taxes, vehicle fees, and

tolls that are levied upon infrastructure users.1617 There exists a negative externality between the

cost users from urban and rural environments pay via the fuel tax and the delays experienced;

because rural users pay the same despite lower levels of congestion due to the urban

environment.18 In order to more efficiently relate user consumption with price paid, Intelligent

Transportation Systems and Strategies, ITS and TSM&O, may be implemented.19 These systems

include metering freeway traffic, optimizing traffic signals, better management of construction

and maintenance zones, and more effective response times to accidents. Metering freeway traffic

not only reduces congestion via deterrence, it provides necessary funding for maintenance and

construction thereby maximizing the benefits received by users.20

Governments have also begun to implement public-private partnerships, PPP, as a

method of funding and distributing the economic burden of maintenance during a project’s life

cycle. These PPP’s operate under a constant sharing of information about project conditions,

16
​Mayres, I. "The efficiency effects of transport policies." ​Journal of Transport Economics and Policy​ 34
(2000): 233-260.​ pg 247.
17
Advisers, Council Of Economic. "Economic Report of the President." Washington, DC: US GPO,
Annual. US Council Of Economic Advisers Economic report of the President (2002). Pg 254-267
18
Council of Economic Advisors, pg 255-267
19
Congestion, Traffic. "Reliability: Linking Solutions to Problems." FHWA, Washington, DC http://www.
ops. fhwa. dot. gov/aboutus/opstory (2004).
20
Fields, Gregory, David Hartgen, Adrian Moore, and Robert W. Poole Jr. "Relieving congestion by adding
road capacity and tolling." ​International Journal of Sustainable Transportation​ 3, no. 5-6 (2009): 360-372.
expenditures, and beneficial interactions between public and private sectors in order to maximize

the benefits received from these projects.21

In conclusion, infrastructure is a large and costly market that is necessary for the

economic growth, sustainability, and continued competitiveness in a global market. In order to

address both the lack of funding and deterioration of infrastructure, governments have begun to

implement congestion reducing systems such as metered freeways and PPP’s to share the

economic undertaking of infrastructure projects. A modern and efficient highway system, and

infrastructure in general, is required for the continued expansion of the economy and population.

21
​Lenferink, Sander, Taede Tillema, and Jos Arts. "Lifecycle driven planning of infrastructure: public and
private experiences with more integrated approaches for managing project complexity." ​EJTIR​ 14, no. 2
(2014): 82-101.
Works Cited:

1. Bogetic, Zeljko, and Johannes W. Fedderke. "International benchmarking of infrastructure

performance in the Southern African customs union countries." (2006).

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=922467

2. Dwight D. Eisenhower: "Annual Message to the Congress on the State of the Union," January 6,

1955. Online by Gerhard Peters and John T. Woolley, The American Presidency Project.

http://www.presidency.ucsb.edu/ws/?pid=10416​.

3. Kessides, Christine. ​The contributions of infrastructure to economic development: a review of

experience and policy implications.​ Vol. 213. World Bank Publications, 1993.

https://books.google.com/books?hl=en&lr=&id=tOH0ra5QaoMC&oi=fnd&pg=PR9&dq=The+Contr

ibutions+of+Infrastructure+to+Economic+Development&ots=x4iEhprUzg&sig=K5Un3LwwMFm-J

CoVXrb-3LJBVn0#v=onepage&q=The%20Contributions%20of%20Infrastructure%20to%20Econ

omic%20Development&f=false

4. Blatt, Harvey. ​America's environmental report card: are we making the grade?​. MIT Press, 2011.

https://www.infrastructurereportcard.org/the-impact/economic-impact/

5. Henckel, Timo, and Warwick J. McKibbin. "The economics of infrastructure in a globalized world:

issues, lessons and future challenges." Journal of Infrastructure, Policy and Development 1, no. 2

(2017): 254-272. Harvard

http://systems.enpress-publisher.com/index.php/jipd/article/view/55

6. “Constitution of the United States, Article 1 Section 8, Congress shall have power to lay and

collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defence

and general welfare of the United States...To regulate commerce with foreign Nations and among

the several States..”

7. Kallhoff, Angela. 2011. Why democracy needs public goods. Lanham, Md: Lexington Books.

http://public.eblib.com/choice/publicfullrecord.aspx?p=730739​.
8. PRIMER, A. "Economics: Pricing, Demand, and Economic Efficiency."

https://cybercemetery.unt.edu/archive/allcollections/20090808031300/http://ops.fhwa.dot.gov/publ

ications/fhwahop08041/fhwahop08041.pdf

9. Black, Alison Premo. "The 2015 US Transportation Construction Industry Profile." (2015). Pg 11

https://trid.trb.org/view.aspx?id=1368193

10. Henckel, Timo, and Warwick J. McKibbin. Pg 7 [See Above]

11. Estache, Antonio, and Grégoire Garsous. "The impact of infrastructure on growth in developing

countries." ​Economics Notes​ 1 (2012).

http://www.ifc.org/wps/wcm/connect/054be8804db753a6843aa4ab7d7326c0/INR+Note+1+-+The

+Impact+of+Infrastructure+on+Growth.pdf?MOD=AJPERES

12. Kohli, Harpaul Alberto, and Phillip Basil. "Requirements for infrastructure investment in Latin

America under alternate growth scenarios: 2011–2040." ​Global Journal of Emerging Market

Economies​ 3, no. 1 (2011): 59-110.

http://journals.sagepub.com/doi/pdf/10.1177/097491011000300103

13. Department of the Treasury, and Council of Economic Advisors. “A New Economic Analysis of

Infrastructure Investment” pg 20-27

https://www.treasury.gov/press-center/news/Pages/03232012-infrastructure.aspx

14. Congressional Budget Office. “Approaches to Making Federal Highway Spending More

Productive.” (2016). pg 10-20

https://www.cbo.gov/publication/50150

15. Perks, R., and C. Raborn. "Driving and Commuter Choice in America: Expanding Transportation

Choices Can Reduce Congestion, Save Money and Cut Pollution." ​Washington, DC: Natural

Resources Defense Council(​ 2013).

https://www.nrdc.org/sites/default/files/driving-commuter-choice-IP.pdf

16. Mayres, I. "The efficiency effects of transport policies." ​Journal of Transport Economics and

Policy​ 34 (2000): 233-260.​ pg 247.

http://www.bath.ac.uk/e-journals/jtep/pdf/Volume_34_Part_2_233-259.pdf
17. Advisers, Council Of Economic. "Economic Report of the President." ​Washington, DC: US GPO,

Annual. US Council Of Economic Advisers Economic report of the President​ (2002).

http://132.248.45.5/cegademex/DOCS/rep_pres_EU.pdf

18. [See Above]

19. Congestion, Traffic. "Reliability: Linking Solutions to Problems." FHWA, Washington, DC

http://www.ops.fhwa.dot.gov/aboutus/opstory​ (2004).

20. Fields, Gregory, David Hartgen, Adrian Moore, and Robert W. Poole Jr. "Relieving congestion by

adding road capacity and tolling." International Journal of Sustainable Transportation 3, no. 5-6

(2009): 360-372.

http://web.a.ebscohost.com.proxy.lib.ohio-state.edu/ehost/pdfviewer/pdfviewer?vid=1&sid=4f02cd

83-28ce-43ce-88ba-74a5c23712fe%40sessionmgr4009

21. Lenferink, Sander, Taede Tillema, and Jos Arts. "Lifecycle driven planning of infrastructure: public

and private experiences with more integrated approaches for managing project complexity."

EJTIR​ 14, no. 2 (2014): 82-101.

https://d1rkab7tlqy5f1.cloudfront.net/TBM/Over%20faculteit/Afdelingen/Engineering%20Systems%20and%2

0Services/EJTIR/Back%20issues/14.2/2014_02_00%20Lifecycle%20driven%20planning%20of%20infrastru

cture.pdf