President

• The private sector plays an important role in providing infrastructure.However, lack of competition in markets for infrastructure raisesconcerns about market power, so that Government oversight issometimes necessary. Government must continually reassess the need foroversight in the face of changing market conditions.The Basic Challenge of Infrastructure PolicyAs the economy grows, demands on our infrastructure increase. Since1980, vehicle traffic on U.S. roads has nearly doubled, passenger-miles of airtraffic have increased by more than 150 percent, and ton-miles of freight onU.S. railroads have increased by more than 80 percent. The Nation’s growingdemand for energy resources, together with a greater emphasis on new sourcesof power, is placing new demands on our energy infrastructure. And thegrowth of the Internet and information technology means that telecommunicationsnetworks are becoming more central to the U.S. economy.Infrastructure systems—whether pipelines, roads, fiber optic networks, orport facilities—require large investments in long-lived capacity. Once thiscapacity is in place, however, small increases in usage may cost relativelylittle to provide. Marginal cost refers to the extra cost associated with a smallincrease in production of a good. Infrastructure investments produce goods,like passenger trips or phone calls, that typically have low marginal cost as longas total demands on the infrastructure do not approach the capacity it wasdesigned to support. Once usage approaches capacity, however, marginal costcan increase substantially as extra use makes the entire system less effective.These features create certain policy challenges that are common to manytypes of infrastructure. To illustrate these challenges, imagine a growing citywhere construction of a new bridge across a river is being considered. Thebridge will provide significant benefits relative to the existing options forcrossing the river—for example, taking a ferry or traveling several miles tocross at another point.One possibility is that a private party will construct the bridge, planningto earn a profit by charging tolls. If the private sector builds a bridge, themarket for river crossings at any given point will likely be provided by a singlemonopolist. This is because providing a bridge involves economies of scale: itis cheaper to build a single bridge that serves 20,000 people per day than twobridges that each serve 10,000 people per day. Because of economies of scale,the market for bridge crossings is called a natural monopoly. Even if there areno artificial barriers to market entry, a monopoly is likely to emerge simplybecause a single firm can produce the good more cheaply than multiplefirms could.138 | Economic Report of the President