Colin has a very good post over at DCist on Metro’s proposed fare increases. As I told Colin, there’s just one point in there on which I’d disagree.

So what should Metro do to cover this and (inevitable) future budget shortfalls? Despite our rejection of the policies Metro is proposing, we think that Metro should do exactly what it is doing: propose large, sweeping fare increases. This should starkly demonstrate to the powers-that-be just what happens when the system is underfunded by the jurisdictions that rely upon it.

My thinking is this: transit naysayers, and particularly those in Richmond, are of the opinion the people ought to pay their own way for stuff. They don’t like to think about taxpayers subsidizing each person that rides Metro, they don’t really like thinking about taxpayers subsidizing those who use highways (hence the new emphasis on toll lanes), they don’t like thinking about folks being subsidized for education or health care or anything. In their mind, therefore, rising Metro fares aren’t a sign that they need to jump in with a dedicated funding stream; they’re a sign that those goddamn hippie liberals are finally weaning themselves off the public teat. In other words, I don’t see this is as a compelling move for Metro, strategically speaking.

Why are so many, generally Republican, people of such a mindset? I think it’s because, for whatever reason, they tend to not appreciate externalities. Externalities can be positive or negative and occur when the full benefit or cost of a market activity isn’t captured by the participants, but is instead conferred on others. An example of a positive externality is corporate research. If IBM invests in research, they’ll no doubt benefit from the knowledge created, but some of that knowledge will leave with employees or become public. Since IBM cannot secure all the benefits of their investment, they’ll underinvest in research (which means they’ll provide an amount that’s less than socially optimal). Pollution, on the other hand, involves negative externalities. A factory that spews carbon dioxide into the air doesn’t have to pay a thing even though there is a cost to society from increased carbon dioxide emissions. Because that factory doesn’t have to pay the full cost of that negative outcome, they’ll choose to overinvest in pollution (or pollute more than is socially optimal).

The way you deal with externalities is by crafting policies that encourage investment in positive externality generating activities and that discourage investment in negative externality generating activities. You could do this by subsidizing research, or taxing carbon emissions, or funding public schools, and so on. As it turns out, transportation technologies are full of externalities. When you drive, your presence on the road makes the road more crowded, negatively affecting others, which is a negative externality. Your automobile also pollutes, which again is a negative externality. When you ride transit, you reverse these effects, which means that the benefit of using public transit extends beyond just the benefit that is conferred on the riders. If transit decisions were made simply based on rider preferences, society would significantly underinvest in transit infrastructure.

But many local leaders don’t see this. They don’t see the benefits that extend to the city as a whole, beyond the actual money that is paid for farecards, and as a result, they see balance sheet losses as a sign of a failing enterprise, and they see transit subsidies as a waste of taxpayer money. This failure of basic economics extends to education, to health care, to research funding, to environmental considerations–all issues for which normal market activity produces an outcome that is not socially optimal. Why should we pour money into education instead of trying to shift costs onto families? Because the benefits of a well-educated individual accrue to the child AND to society as a whole. Why should make sure that everyone has access to affordable health care? Because the benefits of individual health accrue, not just to that individual, but to society as a whole.

It’s amazing how much of conservative policy is undergirded by a complete disregard for the concept of externalities. As much as conservative commentators ridicule their liberal counterparts for abuse of economic principles on trade or labor market issues, it certainly seems that they’d be a bit more conscious of the logs in their own eyes.