Content uploaded by Brett M. Frischmann
Author content
All content in this area was uploaded by Brett M. Frischmann
Content may be subject to copyright.
Electronic copy available at: http://ssrn.com/abstract=2000962
Infrastructure
THE SOCIAL VALUE OF SHARED RESOURCES
Brett M. Frischmann
1
00-Frischmann-FM.indd iii00-Frischmann-FM.indd iii 1/19/2012 5:28:16 PM1/19/2012 5:28:16 PM
Electronic copy available at: http://ssrn.com/abstract=2000962
1
Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence
in research, scholarship, and education.
Oxford New York
Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne
Mexico City Nairobi New Delhi Shanghai Taipei Toronto
With o ces in
Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy
Japan Poland Portugal Singapore South Korea Switzerland ailand Turkey Ukraine
Vietnam
Copyright © by Brett M. Frischmann
Published by Oxford University Press, Inc.
Madison Avenue, New York, New York
Oxford is a registered trademark of Oxford University Press
Oxford University Press is a registered trademark of Oxford University Press, Inc.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior permission of Oxford University Press, Inc.
_________________________________________________________
Library of Congress Cataloging-in-Publication Data
Frischmann, Brett M.
Infrastructure : the social value of shared resources / Brett M. Frischmann.
p. cm.
Includes bibliographical references and index.
ISBN ---- (hbk. : alk. paper)
. Infrastructure (Economics)—Social aspects. I. Title.
HC.CF
—dc
_________________________________________________________
Printed in the United States of America on acid-free paper
Note to Readers
is publication is designed to provide accurate and authoritative information in regard to the subject
matter covered. It is based upon sources believed to be accurate and reliable and is intended to be current
as of the time it was written. It is sold with the understanding that the publisher is not engaged in rendering
legal, accounting, or other professional services. If legal advice or other expert assistance is required, the
services of a competent professional person should be sought. Also, to con rm that the information has
not been a ected or changed by recent developments, traditional legal research techniques should be used,
including checking primary sources where appropriate.
(Based on the Declaration of Principles jointly adopted by a Committee of the
American Bar Association and a Committee of Publishers and Associations.)
You may order this or any other Oxford University Press publication by
visiting the Oxford University Press website at www.oup.com
00-Frischmann-FM.indd iv00-Frischmann-FM.indd iv 1/19/2012 5:28:16 PM1/19/2012 5:28:16 PM
To my wife, Kelly, and my three boys, Matthew, Jake, and Ben
00-Frischmann-FM.indd v00-Frischmann-FM.indd v 1/19/2012 5:28:16 PM1/19/2012 5:28:16 PM
vii
Contents
Introduction ix
|
. De ning In astructure and Commons Management
. Overview of In astructure Economics
. Microeconomic Building Blocks
| -
. I n astructural Resources
. Managing In astructure as Commons
|
. Commons Management and In astructure Pricing
. Managing Congestion
. Supply-Side Incentives
|
. Transportation In astructure: Roads
. Communications In astructure: Telecommunications
|
. Enironmental In astructure
. Intellectual In astructure
00-Frischmann-FM.indd vii00-Frischmann-FM.indd vii 1/19/2012 5:28:16 PM1/19/2012 5:28:16 PM
viii Contents
|
. e Internet and the Network Neutrality Debate
. Application to Other Modern Debates
00-Frischmann-FM.indd viii00-Frischmann-FM.indd viii 1/19/2012 5:28:16 PM1/19/2012 5:28:16 PM
ix
Introduction
is book devotes much-needed attention to understanding how society bene ts from
infrastructure resources and how management decisions a ect a wide variety of interests.
is book links in astructure , a particular set of resources de ned in terms of the manner
in which they create value, with commons , a resource management principle by which a
resource is shared within a community.
Too o en, we take for granted the shared infrastructures that shape our lives, our rela-
tionships with each other, the opportunities we enjoy, and the environment we share.
ink for a moment about the basic supporting infrastructures that you rely on daily.
Some obvious examples are roads, the Internet, water systems, and the electric power
grid, to name just a few. In fact, there are many less obvious examples, such as our shared
language, legal institutions, ideas, and even the atmosphere. We depend heavily on shared
infrastructures, yet it is di cult to appreciate just how much. It is di cult to fully appre-
ciate how these resources contribute to our lives, because infrastructures are complex
and the bene ts provided are typically indirect. We don’t pay much attention to infra-
structure resources, because they are conveniently obscure, part of the background. We
assume their continuous availability and pay attention to them only when catastrophe
strikes, for example when a bridge fails or rolling blackouts deprive us of the electricity we
need. And even then, the public attention given is reactive, isolated, and short-lived.
When a bridge collapses, for example, the immediate public outcry may be su cient
to support e orts to rebuild the particular bridge, but that is about as far as it goes. As the
headline value of the disaster fades, the world moves on. According to the American
Society of Civil Engineers (ASCE), “more than , or one in four, of the nation’s bridges
00-Frischmann-FM.indd ix00-Frischmann-FM.indd ix 1/19/2012 5:28:16 PM1/19/2012 5:28:16 PM
x Introduction
are either structurally de cient or functionally obsolete.”
In , over , bridges in
the United States were categorized as structurally de cient, and in addition, over ,
bridges were categorized as functionally obsolete.
And the problem is by no means
limited to bridges. To take a rather simple illustration, the ASCE Report Card for
America’s Infrastructure (see table I. ) is abysmal, concluding with a “grade point aver-
age” of D and an estimated ve-year investment need of . trillion.
While there are reasons one might quibble with the ASCE grading system or even
particular grades, the basic point is that we have a major infrastructure problem in the
United States. Our complacent, reactive, piecemeal approach to infrastructure is incred-
ibly shortsighted and must change. A more proactive, systematic, long-term approach
to infrastructure is desperately needed, as experts have long recognized.
For such change
ASCE ().
D T () (Table -- contains the relevant statistics on bridges).
is need has long been recognized among expert communities. at is, engineers, economists, and other
experts who focus on infrastructure have long argued for a proactive, systematic, long-term approach to infra-
structure. What has not been recognized or at least explored methodically are the demand-side issues examined
in this book.
. ASCE Report Card for America’s Infrastructure ()
Infrastructure Type Grade
Aviation D
Bridges C
Dams D
Drinking Water D–
Energy D +
Hazardous Waste D
Inland Waterways D–
Levees D–
Public Parks and Recreation C–
Rail C–
Roads D–
Schools D
Solid Waste C +
Transit D
Wa s te wat e r D –
America’s Infrastructure GPA D
Estimated Five-Year Investment Need $2.2 trillion
00-Frischmann-FM.indd x00-Frischmann-FM.indd x 1/19/2012 5:28:16 PM1/19/2012 5:28:16 PM
Introduction xi
to even begin to occur, however, citizens must learn to appreciate the social value of
shared infrastructure.
We simply cannot assume continuous availability. As the ASCE
Report Card indicates, both governments and markets struggle to adequately supply
the public with the infrastructures that it needs. e reasons are many, and this book will
not discuss them all. Infrastructure resources o en require substantial investment to
supply, maintain, and manage. e investment must come from somewhere, and the
public must pay one way or another (taxes, user fees, etc.). As economists like to put it,
there is no such thing as a free lunch. Raising su cient capital to invest can be di cult.
ere are a host of “supply-side” obstacles to e cient infrastructure provisioning.
Economic analysis of infrastructure tends to focus on these issues. But one critical reason,
which is generally overlooked and which this book will confront at length, is that infra-
structure users, as voters and consumers, may not adequately signal social demand for
infrastructures. ere are a host of “demand-side” issues to confront. At bottom, demand-
side problems arise because we do not fully appreciate the social value that infrastructures
provide.
Infrastructure resources entail long-term commitments with deep consequences for
the public. Infrastructures are a prerequisite for economic and social development.
Infrastructures shape complex systems of human activity, including economic, cultural,
and political systems. at is, infrastructures a ect the behavior of individuals, rms,
households, and other organizations by providing and shaping the available opportuni-
ties of these actors to participate in these systems and to interact with each other.
Transportation and communications infrastructures, for example, enable economic and
cultural engagement between communities, expanding the scope of markets and com-
munities by enabling people, goods, and ideas to travel more easily. Legal infrastructure,
including laws and court systems, for example, enable an incredible variety of economic
and social interactions within and across communities. Property and contract laws are a
basic foundation for markets of all sorts. e First Amendment shapes the speech envi-
ronment — the political, economic, cultural, and other conversations people have.
Infrastructure resources are at the center of many contentious public policy debates,
ranging from what to do about our crumbling roads and bridges, to whether and how
to protect our natural environment, to patent law reform, to electromagnetic spectrum
allocation, to providing universal health care, to energy policy, to network neutrality
regulation and the future of the Internet. e list could go on and on. Although the
policy arenas may seem unrelated, all of them are, to some extent, the same. Each of these
policy debates (and many others) involves a battle to control infrastructure resources, set
Just as environmental movement helped society to see what it took for granted, this book aims to bring
infrastructure to the foreground, so we can better see infrastructure where it exists and to sense its potential
where it could come to exist.
00-Frischmann-FM.indd xi00-Frischmann-FM.indd xi 1/19/2012 5:28:17 PM1/19/2012 5:28:17 PM
xii Introduction
the terms and conditions under which the public gets access, and determine how the
infrastructure and various infrastructure-dependent systems will evolve over time.
e battle is joined in each of these areas, with some groups arguing strongly for
recourse to private property solutions
and other groups arguing strongly that such an
approach would be fatal.
ese groups draw on a broader intellectual debate about the
merits of private control over (or, conversely, open access to) various types of resources.
e intellectual debate takes place in a number of elds, including law, economics, and
political science. On the private control side, there is robust economic theory in support
of private ordering via markets with minimal government involvement. By contrast, on
the open-access side, there is a frequent call for protecting the “commons,” but the theo-
retical support for this prescriptive call is underdeveloped from an economics perspec-
tive. In fact, many who oppose privatization, deregulation, and commercialization view
the entire discipline of economics with sincere suspicion and doubt.
is book advances strong economic arguments for managing and sustaining infra-
structure resources as commons. For better or worse, economics has become the method-
ology of choice for many scholars and policy makers in these areas. e book o ers a
rigorous economic challenge to the prevailing wisdom about managing infrastructure.
Within economics, infrastructure resources typically have been evaluated using public
goods and club goods frameworks; under either framework the analysis typically has
focused on the problem of ensuring adequate supply. is book explores a set of ques-
tions that, once asked, seem obvious: What drives the demand side of the equation, and
how should demand-side drivers a ect public policy? Demand for infrastructure
resources involves a range of important considerations that bear on the optimal design of
a regime for infrastructure management.
A demand-side approach facilitates a better understanding of how infrastructure
resources generate value for society and how decisions regarding the allocation of access
to such resources a ect social welfare. e key insights from this analysis are that infra-
structure resources are basic inputs into a wide variety of productive activities and infra-
structure users who choose to engage in such activities o en produce public and social
goods that generate spillovers that bene t society as a whole. Managing such resources as
commons may be socially desirable from an economic perspective because doing so facil-
itates these downstream productive activities. For example, managing the Internet infra-
structure in this manner facilitates active citizen involvement in the production and
e debates involve other issues as well. My point is that infrastructure issues are o en at the core.
E.g., “ privatize public roads and bridges so that rms motivated by pro t incentives will reduce costs and
manage the resources e ciently ” or “ pay providers of ecosystem services for the bene ts their land conveys to
all of us ” or “ let the network owners control what tra c ows across their cables. ”
E.g., “ privatization bene ts only a few, such as current politicians, the owners, and current users with the means
to pay increased tolls ” or “ commodi cation will not solve environmental problems ” or “ network neutrality is
essential to the future of the Internet. ”
00-Frischmann-FM.indd xii00-Frischmann-FM.indd xii 1/19/2012 5:28:17 PM1/19/2012 5:28:17 PM
Introduction xiii
sharing of public and social goods. Over the past decade, this has led to increased oppor-
tunities for a wide range of citizens to engage in entrepreneurship, political discourse,
social network formation, and community building, among many other socially valuable
activities.
To put the basic lesson more plainly: We should share infrastructure resources in an
open, nondiscriminatory manner when it is feasible to do so. is is attractive public
policy — not only for distributional or fairness reasons, but also for e ciency reasons.
Society is better o sharing infrastructure openly. is book explains why. And it also
explains that although many people question the feasibility of sharing, worrying that
sharing will destroy incentives to invest or will lead to overuse, such concerns are
greatly overstated and o en can be addressed in a manner that preserves nondiscrimina-
tory sharing.
e infrastructure commons ideas developed in this book have broad implications for
scholarship and public policy across many elds, ranging from traditional infrastructure
like roads to environmental economics to intellectual property to Internet policy. e
book identi es resource valuation and attendant management problems that recur across
many di erent elds and many di erent resource types, and it develops a functional
economic approach to understanding and analyzing these problems. Accordingly, the
theory is developed at a higher level of abstraction than would be appropriate if it focused
exclusively on a single eld or resource. is means that the theory needs re nement
as it is applied in context. e book o ers no universal prescriptions, because trade-o s
will be di erent in di erent areas. Still, it is helpful and illuminating to take a step back
and look across traditional disciplinary lines before examining the trade-o s. e rst
three parts of this book develop a general theoretical framework for examining the social
value of shared infrastructure. e framework is not tailored to a particular type of infra-
structure. Instead, it is based on a functional economic analysis of the characteristics of
infrastructure resources. e nal three parts of the book apply the framework to
many di erent types of infrastructure, exploring nuanced trade-o s that arise in particu-
lar contexts as well as common issues that cut across di erent contexts. Despite their
obvious di erences, road systems, telephone networks, ecosystems, and ideas have much
more in common than is conventionally appreciated.
Detailed Summary of Chapters
Part I lays the foundation for the economic arguments developed throughout the rest of
the book. Chapters , , and are building blocks. e concepts “infrastructure” and
“commons” are used di erently and o en loosely across a wide range of disciplines,
including engineering, economics, political science, and law. Moreover, the two concepts
are rarely used together. Accordingly, chapter sets forth a general description of the
concepts, drawing on some of the key functional features of in astructure as resources
00-Frischmann-FM.indd xiii00-Frischmann-FM.indd xiii 1/19/2012 5:28:17 PM1/19/2012 5:28:17 PM
xiv Introduction
and commons as a mode of resource management . is discussion highlights some of the
gaps in our understanding of how infrastructure generates social value and the role that
commons management plays in facilitating value generation by infrastructure users.
Chapter gives an overview of infrastructure economics. Surprisingly, there is no par-
ticular sub eld within economics devoted to infrastructure. e overview explains the
basic supply-side orientation of public welfare economics and regulatory economics
and highlights this book’s point of departure — its focus on the demand side. Chapter
provides a detailed discussion of microeconomic concepts that serve as building blocks
for the demand-side theory developed in Part II. e concepts are very important to
understanding the value of infrastructure and evaluating and improving resource
management. (Readers well versed in microeconomics may wish to skip this chapter.
However, the chapter highlights some overlooked demand-side issues that arise in the
analysis of public goods, social goods, and externalities.)
Part II develops a demand-side theory of infrastructure and commons management. It
is the heart of the book. It delineates a set of infrastructure resources based on functional
economic criteria and examines whether managing these resources as commons is an
attractive resource management strategy.
Chapter focuses on infrastructure resources. It aims to identify and evaluate infra-
structure resources functionally from a systems perspective. First, it identi es and exam-
ines three economic criteria common to traditional infrastructure, such as transportation
systems and telecommunications networks, and nontraditional infrastructure, such as
the atmosphere and basic research. Speci cally, infrastructural resources satisfy the
following criteria:
() e resource may be consumed nonrivalrously for some appreciable range of
demand.
() Social demand for the resource is driven primarily by downstream productive
activity that requires the resource as an input.
() e resource may be used as an input into a wide range of goods and services,
which may include private goods, public goods, and social goods.
ese criteria delineate a set of resources that are functionally in astructural . Bear in
mind that the economic concepts woven together in these criteria are carefully explained
in chapter . Second, chapter develops a typology of di erent infrastructure (commer-
cial, public, social, and mixed infrastructure) based on the distribution of productive
activities the infrastructure facilitates. ird, it discusses how both the resource set
delineated by the three criteria and the subsets delineated by the typology are dependent
on demand, and how resources may evolve into or out of the set or subsets. e chapter
explains how di erent types of demand-side market failures arise when spillovers from
public or social goods are prevalent.
00-Frischmann-FM.indd xiv00-Frischmann-FM.indd xiv 1/19/2012 5:28:17 PM1/19/2012 5:28:17 PM
Introduction xv
Chapter connects the demand-side analysis of how infrastructure resources generate
value for society with the management of such resources as commons. e case for
commons management must be evaluated carefully and contextually. Chapter rst
considers commons management as a private strategy. ere are a variety of reasons why
private rms choose to manage their infrastructure as commons. I discuss ve primary
reasons: (a) consumers generally dislike and react negatively to discrimination; (b) com-
mons management may economize on information and transaction costs and avoid
unnecessary complexity; (c) commons management may facilitate joint production or
cooperation with competitors; (d) commons management may support and encourage
value-creating activities by users; and (e) commons management may maximize the
option value of infrastructure when there is high uncertainty regarding sources of future
market value.
Chapter next considers commons management as a public strategy. ere are a
variety of situations in which commons management is not an attractive private strategy
but nonetheless is an attractive public strategy; markets sometimes fail to adopt com-
mons management even when doing so would improve social welfare. e chapter
explains the conventional forms of and justi cations for such regulation. Next, it utilizes
the typology developed in chapter and articulates additional, powerful reasons
to manage public, social, and mixed infrastructure in a nondiscriminatory manner.
Speci cally, commons management can be an e cient means of indirectly supporting
public participation in a variety of socially valuable activities, namely activities that
involve the production, use, and distribution of public and social goods. As such, com-
mons management can be understood as serving two public functions: First, it di uses
pressure within both market and political systems to “pick winners and losers” and leaves
it to users to decide what to do with the opportunities (capabilities) provided by infra-
structure. Second, it functions like an option — a social option. When there is high uncer-
tainty about which users or uses will generate social value in the future, as is typically the
case for public, social, or mixed infrastructure, managing the infrastructure as a commons
sustains the generic nature of the infrastructure, precludes optimization for a narrower
range of activities, and avoids social opportunity costs associated with path dependency.
Together, these public functions suggest a third public function: Commons management
structures the relationships between infrastructure and infrastructure-dependent systems
in a manner that creates a spillover-rich environment, where spillovers ow from the
many productive activities of users. ese activities yield new and unanticipated innova-
tions, knowledge, social capital, and other public and social goods that lead to economic
growth and development as well as social welfare improvements not fully re ected in
traditional economic measures.
ough theory reveals a weight on the scale in favor of commons management that
seems to be ignored in most contexts, the theory does not necessarily tip the balance;
there are other relevant considerations, some more important than others, depending on
00-Frischmann-FM.indd xv00-Frischmann-FM.indd xv 1/19/2012 5:28:17 PM1/19/2012 5:28:17 PM
xvi Introduction
the context. Part III focuses on three sets of complications that must be considered when
evaluating the case for managing infrastructure as commons. e rst set involve the
impacts that commons management might have on pricing practices, and concerns
that nondiscrimination rules must be accompanied by price regulation or government
subsidies. e second set concerns congestion management and complications that arise
when infrastructure is partially (non)rival and thus congestible, and the relationships
between commons management and congestion management. Finally, the third set
concerns the impact of nondiscrimination rules on supply-side incentives. As the chap-
ters reveal, arguments based on these complications should be evaluated carefully. In
many cases, the complications are manageable and do not undermine the case for com-
mons management.
Part IV discusses examples of traditional infrastructure — speci cally, transportation
infrastructure (roads) in chapter and telecommunications infrastructure (telephone
networks) in chapter . ese chapters illustrate how the demand-side theory applies to
these traditional infrastructure resources and how commons management has been
implemented. Both road and telecommunications infrastructures provide generic public
capabilities, mobility and communication, that allow users to engage in an incredibly
wide variety of productive activities. ese activities generate private, public, and social
goods and consequently substantial spillovers to the bene t of society. In the United
States, the vast majority of road infrastructure is publicly owned, and the vast majority
of telephone infrastructure is privately owned. e supply-side stories for these infra-
structures are thus quite di erent. Yet both are sustained as commons, accessible to the
public on nondiscriminatory terms. ese chapters discuss a range of complications.
Road infrastructure is complicated by congestion, negative externalities associated with
environmental pollution, and public nancing of maintenance and improvements.
Telephone infrastructure is complicated by regulatory costs and the di culties of transi-
tioning from regulated monopoly to competition. While these chapters do not exhaus-
tively cover these rich and complex elds, they begin to provide a more nuanced picture
of how these fundamental infrastructure resources generate value for society, the critical
role of commons management, and the various institutional means for sustaining com-
mons when faced with an array of con icting issues.
Part V shi s attention from traditional infrastructure to nontraditional infrastruc-
ture — speci cally, environmental and intellectual infrastructure. It may seem odd to be
grouping roads and telephone networks with lakes and ideas under the infrastructure
umbrella. One reason for doing so is to highlight the demand-side similarities and the
important, if varied, role of commons management. When feasible, society bene ts
tremendously by leveraging nonrivalry to support nondiscriminatory access to such
resources because doing so enables the public to participate productively in a wide range
of socially valuable activities. As with traditional infrastructure, many environmental and
intellectual infrastructure resources are public, social, and mixed infrastructures that
contribute immensely to our economic and social development. e case for commons
00-Frischmann-FM.indd xvi00-Frischmann-FM.indd xvi 1/19/2012 5:28:17 PM1/19/2012 5:28:17 PM
Introduction xvii
management depends, however, on managing a host of competing considerations.
Intellectual infrastructures face supply-side issues similar to those issues faced by tradi-
tional infrastructure. Attracting private investment can be di cult because of the cost
structure of supply, high costs of exclusion, and misappropriation risks. Environmental
infrastructures do not face the same supply-side issues, but environmental infrastructure
face complex congestion and degradation problems. In short, pure open access to intel-
lectual or environmental infrastructure typically is not feasible absent additional institu-
tional support, whether in the form of public subsidies for basic research or in the form
of command and control regulation of industrial polluters. Viewing foundational
environmental and intellectual resources through the infrastructure lens yields interest-
ing insights regarding commons management institutions. In particular, both environ-
mental and intellectual property legal systems construct semi-commons arrangements
that create and regulate interdependent private rights and public commons. Each does so
in very di erent ways, however.
Part VI applies the infrastructure theory to modern challenges. Chapter applies
infrastructure theory to the particularly contentious “network neutrality” debate. At the
heart of this debate is whether the Internet infrastructure will continue to be managed
as a commons. Ultimately, the outcome of this debate may very well determine whether
the Internet continues to operate as a mixed infrastructure that supports widespread
user production of commercial, public, and social goods, or whether it evolves into a
commercial infrastructure optimized for the production and delivery of commercial out-
puts. e chapter criticizes the current framing of the debate as well as the recent rule
enacted by the Federal Communications Commission. It then proposes and defends a
nondiscrimination rule that re ects the core commons management principle discussed
throughout this book. Chapter brie y discusses some additional modern challenges.
00-Frischmann-FM.indd xvii00-Frischmann-FM.indd xvii 1/19/2012 5:28:17 PM1/19/2012 5:28:17 PM
