Regulation as a barrier to market provision and to innovation: the case of toll roads and steam carriages in England.

Author:Benson, Bruce L.
 
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  1. 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 private-enterprise 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) 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 horse-drawn transport, including producers of inputs into such transportation, undermined the potential profitability of the steam-carriage market. (2) 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 horse-drawn 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. (3) 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.

  2. 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). Anyone else who wanted to do so was required to get royal permission. Tolls collected from travelers who used various important bridges and roads were a significant source of royal revenues (Jackman 1966, p. 11). These revenues were not earmarked for road maintenance, however; they went into the general treasury. Local officials such as sheriffs who collected tolls also were granted rights to retain a portion for their own purposes, but those purposes rarely included road maintenance. These officials also resisted any granting of toll-collecting rights to others in fear of losing this revenue source, although kings, and later Parliament, had the power to do so. In fact, there is evidence that some burgesses (merchants who formed local governments in market towns) petitioned for and were granted the right to collect tolls as early as 1154 (Jackman 1966, pp. 9-11).

    There was one situation under which a private citizen could collect tolls without royal permission: landowners could charge for passage through private land as long as an easement had not already been established. As transportation demands increased and roads deteriorated, enterprising landowners began to establish new "private roads" that allowed travelers to avoid the "ill-repaired public highways" (Pawson 1977, pp. 73-74) and that charged tolls for access. The potential impact of this option was severely limited, however, both by the fragmentation of land ownership and, perhaps more importantly, by the fact that easements for many feasible routes already existed.

    Roads in Anglo-Saxon England were largely established and maintained by local "hundreds" (Webb and Webb 1913, pp. 6-7; Jackman 1966, pp. 4, 33), which can be characterized as voluntary associations or clubs (Benson 2014). These roads passed over private land, so easements were recognized for members of the hundreds, and individual landowners maintained the roads for everyone to use. Occasionally, long-distance travelers also used these roads. The Normans claimed that all land, including roads, belonged to the king, however, and the royal court freely traveled over many of them. The Normans also undermined incentives that supported the hundreds (Benson 2014), but the church and merchants stepped in to provide and maintain many existing roads that had been created by the hundreds (Jackman 1966, pp. 8, 15-16, 30-32; Gregory 1932, pp. 97- 98; Pawson 1977, p. 68; Benson 2006, 2014). The monasteries often took leadership, drawing on local parishes for assistance.

    Henry VIII dissolved the monasteries in 1536-39, however, divided their properties, and transferred them to "a class of rapacious landlords who would be slow to recognize any claim upon their rents for the maintenance of roads.... The inevitable result would be a rapid decadence of many highways which had hitherto been in common use" (Jackman 1966, p. 29; also see Gregory 1932, p. 96; and Parkes 1925, p. 7). Local parishes continued to maintain roads in many areas, particularly for local travel (probably 80 to 85 percent of the actual roads in Great Britain), but the elimination of the monasteries was apparently quite significant with regard to the roads heavily used for long-distance travel by people dealing with or part of the royal court, as well as merchants, officials of the Church of England, and pilgrims. These roads began to deteriorate (possibly 15 to 20 percent of the roads).

    Indeed, Jackman (1966, pp. 30-31) contends that seizure of the monasteries was the primary factor leading to passage of the "Statute for Mending of Highways" in 1555, mandating that parishes establish a very specific institutional arrangement for maintenance of all roads, and parishioners were required to provide specific amounts of labor and other inputs to road maintenance without compensation. (4) Parishes generally did not provide adequate maintenance for heavily traveled roads despite the 1555 mandates, so a long series of additional statutes attempted to create sufficient negative incentives (e.g., fines) to induce parishioners to do their mandated road-maintenance duties. Ultimately, none worked, and the system of fines evolved into commutations to be collected from individual parishioners, relieving their obligations to perform the statutorily mandated duties. These collections allowed local justices of the peace (JPs) to hire laborers to work on roads (Pawson 1977, p. 71; Webb and Webb 1913, pp. 20-21). Commutations were supplemented with a general highway tax from the mid-seventeenth century onward. However, an even more important source of funds was generated through criminal law, as fines were levied by the royal courts through presentment or indictment of parishes as a whole for the non-repair of its highways (Webb and Webb 1913, pp. 51-61). (5)

    Members of several parishes recognized that private toll roads suggested an alternative way to finance road maintenance, and the early market-town toll roads provided clear precedent for granting the right to limit road access and charge tolls. Given the ongoing failure of the parish system of road maintenance, Parliament needed an alternative, so when parishioners began petitioning for the right to establish toll roads, (6) the response was positive. A long series of parliamentary acts was passed beginning in 1663, each enabling the establishment of a local ad hoc body known as a "turnpike trust." These were not parliamentary innovations, however, as the initiative was always at the local level (Albert 1972, p. 12). Parishioners had to petition Parliament for each segment of road over which they wanted to establish tolls. (7)

    After about 1700, the turnpike-establishment process became fairly standardized. A group of local landowners and/or merchants would accumulate the funds to pursue a turnpike act from...

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