NB 2: I have used "roads" as a proxy for "infrastructure", because they are the oldest and most basic kind of infrastructure. Everything else, mains water, sewerage, mains gas, electricity, telephone lines and broadband, follows the roads, both in a chronological and literal sense. And 'public services' like policing, fire brigade, refuse collection also need "roads" to get access to your house (and you need your telephone to get in touch with them - mobile phones are a special case which I won't cover further).
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Let us assume that town planning is carried out by an economically rational, reasonably benevolent monarch (the idealised state), and that he has to do town planning for an area of 100 units, where each unit is big enough for a house and garden. (It could just as well be a campsite owner dividing up his site into plots big enough for one tent/one caravan who wants to maximise his rental income, but enough with the analogies).
Option a) is to simply divide up the area into 100 plots with no roads between them. Clearly, the monarch would be able to sell off or rent out the outside ring of plots, but if you live in the next layer in, you won't be willing to pay much to live there, because every time you want to get out you will need to agree with one of your neighbours that you can cross his plot. Those three or four rows inwards will be nigh worthless:
Option b) is the default option. The monarch dedicates 36 units to roads and ends up with 48 plots and 16 spare plots, which could either serve as little communal parks for the surrounding 12 plots, or end up as larger back gardens:
Would the total value of these 48 plots, all with access to "roads" (and sewerage etc and whatever they invent next after broadband) be higher than the total value of the 100 plots in option a)?
Yes of course. Or else towns and cities wouldn't be laid out like this.
Now, does the monarch need to somehow pay for the roads out of the goodness of his own heart and/or do they reduce the income he can generate from those 48 plots to less than what he could get from the 100 plots in option (a)?
No of course not.
He knows that he can charge fuel duty which will cover the cost of road maintenance three times over; that he can allow privatised utilities to pay for the pipes and cables and that they will make their money back and more by charging you for water, gas, electricity etc.
With option a), how much would residents of the inner plots be willing to pay for police, refuse collection, fire brigade? Not much, because those services won't be able to reach the inner plots without having lengthy and expensive negotiations with the residents of all the outer plots first.
With option b), residents will be quite happy to pay for a share of these services, as these things are per-capita-cheaper the more people share the cost and the more easily accessible your house is. The benefit of these things vastly outweighs the cost of providing them, so that boosts the rental value of the plots even further.
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Q: But ultimately, what are people on the plots in option (b) really paying for?
A: They are paying for access to other people. A resident in (a) can only freely contact 8 other residents. A resident in (b) can freely contact all the other residents, and as the town expands, he has access to more and more people; this enable specialisation, for work or for hobby purposes and so on.
The roads, telephone lines and broadband are not really an end in themselves (even though they generate profits for the people who build and operate them). They only have a point if you can drive somewhere, ring somebody up or look something up that somebody else has put up on the internet.
The utility companies make money by providing you with stuff far more cheaply or conveniently than you could provide for yourself; part of the cost is the length of the pipes and cables, so the closer together people live, the lower the per capita cost of having them.
Much the same goes for police, fire brigade and refuse collection, even if people are paying towards the cost. They enable more people to live together more safely, securely and hygienically, thus still making a net overall profit after the costs have been paid. And the closer together people live, provided they have access to more people as a result (in a literal or figurative sense), the cheaper the utilities, the more people can specialise, the more they can find like-minded with whom to socialise, the more people they can exchange goods and services with and thus the more wealth is created.
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So:
- the notion that roads and utilities are a cost to the people who provide them is a nonsense; given sensible town planning, people can make a profit by providing them. So there's a producer surplus, and clearly there is a consumer surplus too (people are prepared to pay more for a house which has good transport links, mains water, broadband, whatever whizz bang invetion comes along in a few decades that we haven't even dreamed of yet, etc).
- ultimately, the only real driver of the values of the plots are simply the people who live there. Having more potential customers = producer surplus, having more potential suppliers = consumer surplus. The road and utility owners/providers need paying customers far more than people need utilities (compare and contrast Humber Bridge with Channel Tunnel).
- quite what role the original "landowner" plays in all this wealth creation (the producer and consumer surpluses) is still completely unclear to me.
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