Can privatization of U.S. highways improve motorists' welfare?

We assess the welfare effects of highway privatization accounting for government's behavior in setting the sale price, firms' strategic behavior in setting tolls, and motorists' heterogeneous preferences for speedy and reliable travel. We find motorists are able to benefit from privatization by negotiating tolls with private providers that increase their consumer surplus. Surprisingly, we find that by obtaining tolls and service that align with their varying preferences, motorists may be better off negotiating with a monopolist than with duopoly providers or under public–private competition. Toll regulation may be counterproductive because it is likely to treat motorists as homogeneous.

Research highlights► Public highways are characterized by massive economic inefficiencies. ► Motorists’ have varying preferences for prices and service. ► Private highway owners could benefit motorists by responding to their preferences. ► Private highways would also be financially viable.