Public Goods Theory and Private Provision: Why Governments Finance Roads but Do Not Build Them

Government is often viewed as the primary provider of public goods; however, this characterization is incomplete. Many public goods, such as roads and bridges, are produced by privately owned firms operating under municipal contracts that supply engineering, consulting, and project management services. As a result, public goods theory is a central component of microeconomic analysis and provides a useful framework for understanding how such arrangements function.

Public Goods: Non-Excludability and Non-Rivalry

A pure public good, by definition, is both non-excludable (making it difficult/impossible for someone to be excluded from its use) and non-rival (having no effect on another individual's ability to access/use) in nature. Roads are an example of a close approximation of the definition of a pure public good until a point at which road congestion has occurred. The construction of bridges, highways, and traffic systems results in significant positive spillover effects for all non-users because commerce is facilitated through efficient flow of vehicles, emergency service providers have more effective capabilities to respond to emergencies, and property values tend to rise in an area.

The aspect of non-excludability leads to the fact that private markets may not provide sufficient supply of goods such as a road. People may act as free riders on the contributions of other people, creating situations of market failure. For this reason, roads and bridges are typically funded by government entities through the collection of taxes.

However, the distinction between the financing and production/provision of a pure public good is the important economic distinction.

Government Ensures Provision; Markets Produce Inputs

The public goods theory shows that government should find ways to ensure that public goods are provided. This does not imply that they must put in place measures to take over each and every aspect in the process of producing. The government's strength lies in its ability to tax, coordinate, and plan into the distant future. Conversely, the private sector typically possesses strengths in actually getting the work done.

Much of the knowledge necessary for the planning and construction of infrastructure involves very specialized types of intellectual capital or "human capital": civil engineering, geotechnical engineering, transportation modeling, materials science, and regulatory compliance. Some municipalities may establish in-house planning departments, however it is typically inefficient to have cutting-edge engineering teams on a full-time basis, particularly when large infrastructure projects happen sporadically.

For example, cities frequently contract firms offering transportation engineering services in Orlando rather than maintaining large in-house teams for every roadway redesign or traffic impact study. The government establishes objectives, standards of design, and funding tools; while the private sector develops and manages the design of the project(s).

Economic Forces Driving Private Provision

The presence of several economic forces provides a foundation for understanding the policy-relevant model.

First, economies of scale play an important role. Engineering firms frequently operate across multiple municipalities or states, allowing them to spread learning and fixed costs over many projects. This avoids the higher average costs associated with maintaining a permanent municipal workforce to undertake large capital projects that occur only intermittently.

Second, competition among bidders serves as a mechanism of cost discipline. Public procurement processes enable municipalities to solicit bids from multiple firms, thereby pushing prices toward competitive levels.

Risk allocation can also be more efficient when responsibility is assigned to the party best equipped to manage it. Infrastructure projects often face cost overruns, environmental challenges, and design risks; contractual arrangements can allocate responsibility and penalties in ways that are difficult to achieve when production is retained within public agencies.

Finally, the United States faces trillions of dollars in infrastructure needs over coming decades. Meeting the resulting demand for engineering services will require capacity beyond what public agencies alone can supply. Contracting with private firms therefore expands productive capacity without necessitating a proportional increase in the public-sector workforce.

Real-World Examples

Across the country, public and private entities collaborate to provide transportation-related services. For example, state departments of transportation retain planning authority and provide initial project funding, while private engineering firms supply detailed designs for specific bridges, highway expansions, and traffic systems. In Florida, the state department of transportation contracts with local and national transportation firms to redesign roadways, optimize traffic signals, and model congestion.

The central issue is not the transfer of infrastructure ownership to private entities, but rather the capacity of the private sector to specialize in the provision of specific production inputs. The public sector retains authority over permitting, zoning, and public safety, while private firms operate within the regulatory framework established by public institutions.

Ramifications and Tradeoffs

This institutional structure has both advantages and disadvantages. On the positive side, it encourages innovation, promotes technical specialization, and allows public agencies to access advanced engineering techniques and software without maintaining permanent, full-time in-house capabilities.

However, reliance on private contractors governed strictly by contract specifications can create institutional dependence between public agencies and suppliers. As agencies increasingly depend on external contractors, they may reduce internal technical capacity, thereby weakening their ability to independently evaluate proposals. This dynamic can intensify dependence and give rise to principal–agent problems, in which contractors prioritize profit-maximization over the long-term durability and performance of public infrastructure.

From the perspective of public goods theory, the underlying economic logic remains that the state addresses market failure by ensuring infrastructure is financed and delivered through taxation, while the production of that infrastructure can remain allocated to the market.

Conclusion

Public goods theory explains why roads and bridges are constructed by the public but built by the private sector. Government involvement is justified because of non-excludability; therefore, the government does not have a monopoly on production. The separation of the public provision of goods and private production of those goods is a reflection of specialization, comparative advantages, and efficient allocation of risk. In current institutional settings, the government assures that the goods exist and the market assures that the goods are built efficiently.