Academic journal article Journal of Private Enterprise

Regulation as a Barrier to Market Provision and to Innovation: The Case of Toll Roads and Steam Carriages in England

Academic journal article Journal of Private Enterprise

Regulation as a Barrier to Market Provision and to Innovation: The Case of Toll Roads and Steam Carriages in England

Article excerpt

I. Introduction

William Albert (1972, p. 3), in his widely cited and recently reprinted book, The Turnpike Road System in England, 1663-1840, states, "In England the various transport sectors developed gradually and were controlled almost entirely by private enterprise." Since English roads today are largely publicly provided and financed through taxes, the implication appears to be that the market failed to provide sufficient roads, and the government stepped in to alleviate the "public good" problem. This implication is not warranted. While private organizations in England were often heavily involved in road provision, including turnpike trusts, the implication that the country's road system, or more specifically, the turnpike system, was a privateenterprise arrangement is very misleading. Parliament heavily regulated the turnpike system. It set tolls through the political process to benefit organized special interests, it did not allow trustees to be paid, it required any excess of revenues over costs to be invested in road improvements (i.e., profit taking was illegal), and it often prevented efficiency-enhancing mergers. The turnpike system's ultimate failure does not imply market failure; excessive regulation imposed by the British Parliament prevented development of an effective private enterprise system of roads.

The point that regulation reflects the demands of special interest groups and can cause "market failure" is neither new nor unique (see, e.g., Tullock 1967; Stigler 1971).1 2 Many industrial organization and public choice economists now recognize that regulations can and often do create monopoly power by preventing entry, setting prices, and limiting competition in other ways. Turnpike regulations certainly were manipulated by Parliament to meet the demands of special interest groups such as railroads to reinforce monopolistic "market failure." For instance, by setting tolls and access rights, Parliament prevented adoption of innovations in horseless methods of road transportation, which would have posed serious competitive challenges to railroads. When entrepreneurs attempted to introduce steam carriages several decades before the advent of the internal-combustion automobile, high tolls and access limits that reflected the combined political power of railroads and the providers of horsedrawn transport, including producers of inputs into such transportation, undermined the potential profitability of the steam-carriage market." These carriages would have been serious competitors for alternative transportation modes, but Parliament did not allow them to compete. Since Parliament gave railroads monopoly rights over routes, and railroads quickly eliminated horsedrawn competition as new routes were established, railroads enjoyed a long period without significant competition. Furthermore, the additional innovations in horseless road transportation that would have been discovered and adopted in England over the next several decades were lost.

Regulation of turnpike trusts also created an institutional environment that inevitably led to what might appear to be a public-goods market failure. ' A potential market certainly "failed" to provide adequate roads, ultimately leading to government provision, but as with regulation-generated monopoly power, this failure was not due to market-created incentives; it was due to regulations that did not allow a market to create incentives.

Section 2 examines the development of the highly regulated turnpike system. Section 3 continues with a discussion of why regulations imposed by Parliament led to the turnpike system's decline. Section 4 explains the impact of regulations on a specific example of innovation, steam carriages, and the resulting market power for railroads. Section 5 follows with an examination of the regulatory factors that led to the demise of the turnpike system, and section 6 concludes.

II. England's Turnpike System

The use of tolls had a long history in England before the turnpike era, but kings claimed for themselves the exclusive right to charge tolls (with one exception, discussed in the following paragraph). …

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