My most recent contribution to the Planetizen blog Interchange didn't stay up long before it was attacked by Todd Litman, executive director of the Victoria Transportation Institute. Feel free to read and weigh in.
I say in part:
Defining what is meant by an “externality” or “external cost” is important because it creates a set of parameters for policy intervention. Following the conventional definitions used in economics, political science, public administration, and public policy analysis, an externality exists when a third party bears the unintended cost (or benefit) of a transaction or action even though they weren’t part of the exchange. (My standard reference is the survey Dennis Mueller’s Public Choice III, see page 25.) Because costs are born involuntarily, policy intervention is justified to mitigate or correct the harm. While external benefits are probably more common, they don’t get much attention because they generally don’t pose serious problems that must be addressed through public policy.
This brings me to the main focus of this post: Are the taxes levied to fund roads an external cost? No. For the most part, they are not costs imposed on unwilling third parties. Rather, roads are usually classified as public goods, which are products or services that are socially valuable but cannot (or will not) be provided privately. The subsidies used to provide roads are the explicit costs of providing these public goods for society’s benefit in the same way that general taxes are used to support the court system. In fact, most communities vote on property and sales tax increases to fund roads, and they approve these quite often. Thus, subsidies to build, maintain, and operate roads are not properly called an external cost, or even an external effect, let alone an unintended effect, of automobile use. Since the vast majority of travel is on roads, any third party external costs as they relate to financing these transportation systems are likely very small.
Todd says I'm wrong. I think Todd is confusing externalities with public goods, both of which are justifications for market intervention. You can decide (and weigh in on the debate).