Why Logistics capacity remains perennially short, while wastes multiply

Private enterprises generally under-produce goods and services that result in positive externalities, like primary education or roads or rail networks, where social benefits are enormous whereas the costs are not borne by the majority who benefit; negative externality goods are always over-produced therefore, as producers reap the full benefit whereas some of the costs are not borne by them and are shared by others, including consumers and non-consumers.

The free rider problem starts with a private investment made whose benefits are enjoyed by those who do not pay for it. Benefits of primary education will pass on to the society at large, the investment in quality is more likely to be dis-incentized. Building a road clearly benefits a large cross section of people, not all of them bear the costs while they enjoy the benefits; think of the housing boom associated with the making of the road and the rise of property prices. If the congestion that would result is priced in the additional taxes it would moderate the housing frenzy associated with a road development.

Supply Chains suffer from this under-investment problem in infrastructure, which is due to preponderance of positive externality goods and services. Infrastructure spending by the private sector remains muted and only limited to the inside of plant or warehouse establishments and the periphery. The solution therefore shifts to government spending to bridge the gap, but raising enormous costs that have to be fuelled by taxes, while the wastes are never tamed.

Logistics is needed by one and all, so no one would complain about the infrastructure spending, but the puzzle is that whatever gets done remains short of the requirement as no one would come forward to partner either in the investment (bearing the burden of cost) or in sacrificing a benefit that would reduce cost. Wastes in infrastructure use is one primary reason why this is the case; absence of private investment makes everyone waste that much more.

On the other hand as the perceived private benefit from infrastructural spend is always lower than social benefit, the willingness to pay for it is that much lower. As public policy this would find lukewarm response if the road taxes are raised beyond a point or railroad ticket prices for citizens are increased. Thus private benefits so far have been far higher than the costs attracting more demand. Efficiency can only improve if it was otherwise.

As more infrastructure is being built we have still far more requirements being created. By the time we double our highways and railroad, the need to treble is already cast in stone, such are the woes associated with wastes.

Private investment in public goods if incentivized properly raises the responsibility and reduces wastes. Think of the railroad built by the private sector in America, by Standard Oil and its ilk, the drive for efficiency was relentless, reducing wastes; no one dared to make bridges to nowhere or railroad to cater to a very small constituency while those that were frequented by many got a fraction of attention.

Widening a road would attract even more cars to ply and having more parking slots would ensure even more cars to move into the city. Disincentivizing this would shift the demand to other sources of supply like public transport; investing in public transportation is the right solution, which however can be run privately.

Investing in roads in isolation will only generate more demand for roads, investing in public transportation systems, including mass transport system that is privatized will limit positive externality.

The root problem is whether the price a citizen pays for a transportation goods or service is commensurate with the costs.

If the tolls on the road become too much, cars & trucks will definitely reduce on the road, mass transportation will get the benefit of this, including railroad. When rail tariffs will become exorbitantly high, the shift to road will be a natural corollary.

Selecting between competing infrastructural projects the best that the government can do is bring in parity where consumers understand the social marginal benefit as opposed to the private marginal benefit.

The Swiss have done this with a moderation principle. The crucial puzzle is decongesting the living space itself in a city and not allowing a housing overdrive, while making costs match benefits.

Most city boundaries are artificial, driven by the property prices, this is where the root of congestion develops. While property prices do not factor the cost of congestion, the private costs of using the congested road far exceed the social benefits that the road was originally designed for.

There are just as many parking spaces that can be absorbed by Zurich, this limits the number of cars that can get into Zurich; the public transport is perhaps just as expensive but it exactly matches the private benefit.

When social benefits are as close to the private benefit, the puzzle of positive externality vanishes; letting infrastructure benefits to go a waste is the least that we can do. Taking responsibility is where the behaviors have to transform.