Not all potholes should be fixed

The National Party announced a policy this week of fixing potholes, if they are elected later this year. As the New Zealand Herald reported yesterday:

National is pledging to pour $500 million over three years into a Pothole Repair Fund to address what it calls the “shocking state of our local roads and state highways”...

The announcement follows a nationwide campaign from the National Party to highlight the state of the roading network, and in particular, encouraging people to send in photos of potholes.

National’s transport spokesperson Simeon Brown, who unveiled the policy in Auckland alongside leader Christopher Luxon today, said there would also be a new directive for Waka Kotahi/NZ Transport Agency to double the current rate of roading renewals and make “fixing the roads” the number one priority.

Do we really need to fix all of the potholes? It's an unpopular question, and may have an unpopular answer, because the answer could well be 'no'.

There are two ways to approach this question using the basic tools of economics I covered in my ECONS102 class last week. The first way is to consider fixing potholes as a yes/no decision for each individual pothole - this is an application of incremental analysis. Using incremental analysis, we weigh up, for each pothole, the benefits of fixing it against the costs of fixing it. If the benefits outweigh the costs, then the pothole should be fixed. If the costs outweigh the benefits, then the pothole should not be fixed.

When would the costs of fixing a pothole outweigh the benefits? The benefits of fixing a pothole will be much lower on a remote rural road that is infrequently used than on a major highway. The costs of fixing a pothole will be much higher in a remote location than somewhere close to urban centres, because of the time cost of getting workers to the pothole to fix it. So, it is possible that potholes in remote rural locations may have costs that are greater than benefits. Repairing those potholes certainly has lower benefits and higher costs than repairing potholes on major highways close to urban centres.

The second way to approach the question is to consider the optimal number of potholes to fix - this is an application of marginal analysis (similar to my post last week about elk). We can use marginal analysis to find the optimal quantity of pothole repairs - if there are more potholes than the optimal quantity of repairs, then it makes sense to leave some potholes unrepaired.

The marginal analysis model is illustrated in the diagram below. Marginal benefit (MB) is the additional benefit of repairing one more pothole. The marginal benefit of pothole repairs is downward sloping. Not all pothole repairs provide the same benefit. As noted above, those on main highways likely provide much higher benefit than those on remote rural roads. If we target resources to the highest benefit potholes first, each additional pothole that is repaired must provide less additional benefit (lower marginal benefit) than the previous one. Marginal cost (MC) is the additional cost of repairing one more pothole. The marginal cost of pothole repairs is upward sloping - the more potholes are repaired, the higher the opportunity costs of repairing one more pothole. Think about the labour involved. The more workers are diverted to pothole repair, the more society is giving up in other production from those workers. Or, to attract more workers to pothole repair, we would have to offer higher wages. Either way, the marginal cost of pothole repairs increases as we do more repairs. The 'optimal quantity' of pothole repairs occurs at the quantity where MB meets MC, at Q* pothole repairs in the diagram.

Now, consider what happens if we conduct more than Q* pothole repairs, such as Q2. For every pothole repair beyond Q*, the extra benefit (MB) of each repair is less than the extra cost (MC) of each repair, making us worse off. So, it is clear that it is possible to repair too many potholes, in which case not all potholes should be fixed. If we are repairing more than Q* potholes, then we are repairing too many.

It is also possible to repair too few potholes. That would be the case if we repaired fewer than Q* potholes, such as Q1. For every pothole repair below Q*, the extra benefit (MB) of each repair is more than the extra cost (MC) of each repair, so we would be better off with one more pothole repair.

So, both incremental analysis and marginal analysis suggest that not all potholes should necessarily be fixed. Having said that, it is still possible that every pothole should be repaired. Using incremental analysis, if the cost of repairing potholes is sufficiently low, and/or the benefits of repairing potholes is sufficiently high, then it is possible that the benefits outweigh the costs for repairing every pothole. Similarly, using marginal analysis, it is possible that the marginal benefit of repairing the very last pothole is greater than the marginal cost of repairing that pothole. That would only be the case if there were fewer than Q* potholes in total.

Should the National Party be pledging to spend an additional $500 million on pothole repairs? Without knowing more details about the incremental benefits and costs of individual pothole repairs, or the marginal benefits and costs of pothole repairs generally, we can't answer that question directly. However, just as it is possible to spend not enough on pothole repairs, it is possible to spend too much.