Economic Development: Infrastructure and

This entry reviews the evidence on the impact of public infrastructure on the economy. It also examines why public infrastructure is provided inefficiently. Several methodologies have been used to investigate the economic impact of public infrastructure investment. Additional infrastructure investment generally has a positive, but modest, impact on economic activity. The modest impact reflects the offsetting effects of higher taxes needed to finance projects and, for highways, the incentive to relocate economic activity. Most infrastructure is provided at a zero price. This results in overuse and congestion. Zero pricing makes it difficult to determine the optimal amount of infrastructure. The solution is to switch to a variable-pricing system where the price reflects the social marginal cost of using the road or airport. New technology makes this possible at low administrative costs. Political factors have an impact on infrastructure investment decisions. The evidence indicates that political forces create incentives to underestimate costs and overestimate demand, inflating benefit–cost ratios, resulting in noneconomic projects being funded. Many local infrastructure projects are funded by national governments. Legislators vote for noneconomic projects because the local benefits exceed the local share of the total costs even when the local benefits from the project are less than the total cost. There is a significant net loss to society as a result of this type of voting behavior.