Utilities, Schools and Induced Demand

Numerous commentators have questioned the view that increased highway spending reduces congestion, pointing out that highways may increase demand for driving, thus leading to more traffic.  In a recent newsletter, Robert Poole responds to the “induced demand” concept by writing:

And this gets back to the question of how a highway provider should respond to increased demand from its customers. Should it tell the customers they are wrong to prefer personal mobility? Should an electric utility tell its customers they should switch to wood-burning stoves, rather than adding generating capacity? Should a school district not add schools to serve a growing population of families with kids? Infrastructure providers are supposed to provide the vital facilities that people need (and are willing to pay for), not tell them their preferences are wrong.

But the comparison between highways and other goods strikes me as not quite right.  The utility customers are presumably paying for their electricity.  By contrast, even if gas taxes were equal to highway spending (which they often aren’t) the highway system is rotten with cross-subsidies: because all drivers pay into the same gas tax trust fund, taxes paid by urban drivers can be used predominantly to serve rural drivers, or vice versa.  Moreover, highway spending may create externalities, because increased driving leads to increased pollution.  So yes, sometimes preferences are "wrong", in the sense that accommodating them creates social costs.  

What about the school district analogy?  Poole seems to think that it is axiomatic that of course school districts should add population where there are more children. But it seems to me that this need not be the case: school districts can always enlarge classes.  Here, as in the situation of highways, the right answer depends on externalities: do larger classes create worse educational results, thus creating societal externalities (such as stupider graduates who are less productive or more criminal)?  And does such harm outweigh the social costs of raising taxes to build more schools?  I suspect the right answer is: sometimes yes, sometimes no.