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Self-Financing Roads

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  • Erik T. Verhoef

    ()
    (VU University, Amsterdam)

  • Herbert Mohring

    ()
    (University of Minnesota)

Abstract

Mohring and Harwitz (1962) showed that, under certain conditions, an optimally designed and priced road would generate user toll revenues just sufficient to cover its capital costs. Several scholars subsequently explored the robustness of that finding. This paper briefly summarizes further research on the relationship between congestion-toll revenues and road costs. Despite its transparency, the self-financing theorem can lead to erroneous interpretations. The paper’s second part discusses three such possible fallacies. It uses a simple numerical model to investigate them. The model shows that the naïve interpretation of the Mohring-Harwitz rule may lead to substantial welfare losses. These losses are particularly prominent when the difference between capital and investment cost is confused and when balanced-budget constraints are imposed under second-best network conditions. In contrast, losses from imposing a balanced-budget constraint when economies or diseconomies of scale exist are surprisingly small.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-068/3.

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Date of creation: 04 Sep 2007
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Handle: RePEc:dgr:uvatin:20070068

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Related research

Keywords: Traffic congestion; Road pricing; Road capacity choice; Road financing;

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References

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  1. Erik T. Verhoef, 2005. "Second-best Road Pricing Through Highway Franchising," Tinbergen Institute Discussion Papers 05-082/3, Tinbergen Institute.
  2. Liu, Louie Nan & McDonald, John F., 1998. "Efficient Congestion Tolls in the Presence of Unpriced Congestion: A Peak and Off-Peak Simulation Model," Journal of Urban Economics, Elsevier, vol. 44(3), pages 352-366, November.
  3. Arnott, Richard & de Palma, Andre & Lindsey, Robin, 1993. "A Structural Model of Peak-Period Congestion: A Traffic Bottleneck with Elastic Demand," American Economic Review, American Economic Association, vol. 83(1), pages 161-79, March.
  4. Richard Arnott & Marvin Kraus, 1995. "Self-Financing of Congestible Facilities in a Growing Economy," Boston College Working Papers in Economics 304., Boston College Department of Economics.
  5. Richard Arnott & Marvin Kraus, 1994. "When Are Anonymous Congestion Charges Consistent with Marginal Cost Pricing?," NBER Technical Working Papers 0154, National Bureau of Economic Research, Inc.
  6. Small, Kenneth A., 1999. "Economies of scale and self-financing rules with non-competitive factor markets," Journal of Public Economics, Elsevier, vol. 74(3), pages 431-450, December.
  7. Small, Kenneth A. & Gomez-Ibanez, Jose A., 1999. "Urban transportation," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 46, pages 1937-1999 Elsevier.
  8. Vickrey, William S, 1969. "Congestion Theory and Transport Investment," American Economic Review, American Economic Association, vol. 59(2), pages 251-60, May.
  9. Erik T. Verhoef & Jan Rouwendal, 2004. "Pricing, Capacity Choice, and Financing in Transportation Networks," Journal of Regional Science, Wiley Blackwell, vol. 44(3), pages 405-435.
  10. C. Robin Lindsey & Erik T. Verhoef, 1999. "Congestion Modelling," Tinbergen Institute Discussion Papers 99-091/3, Tinbergen Institute.
  11. Kraus, Marvin, 1981. "Scale economies analysis for urban highway networks," Journal of Urban Economics, Elsevier, vol. 9(1), pages 1-22, January.
  12. Verhoef, Erik & Nijkamp, Peter & Rietveld, Piet, 1996. "Second-Best Congestion Pricing: The Case of an Untolled Alternative," Journal of Urban Economics, Elsevier, vol. 40(3), pages 279-302, November.
  13. Keeler, Theodore E & Small, Kenneth A, 1977. "Optimal Peak-Load Pricing, Investment, and Service Levels on Urban Expressways," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 1-25, February.
  14. Newbery, David M, 1989. "Cost Recovery from Optimally Designed Roads," Economica, London School of Economics and Political Science, vol. 56(222), pages 165-85, May.
  15. Wilson, John D., 1983. "Optimal road capacity in the presence of unpriced congestion," Journal of Urban Economics, Elsevier, vol. 13(3), pages 337-357, May.
  16. Yang, Hai & Meng, Qiang, 2002. "A note on "highway pricing and capacity choice in a road network under a build-operate-transfer scheme"," Transportation Research Part A: Policy and Practice, Elsevier, vol. 36(7), pages 659-663, August.
  17. William C. Wheaton, 1978. "Price-Induced Distortions in Urban Highway Investment," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 622-632, Autumn.
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Citations

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Cited by:
  1. Verhoef, Erik T. & Koh, Andrew & Shepherd, Simon, 2010. "Pricing, capacity and long-run cost functions for first-best and second-best network problems," Transportation Research Part B: Methodological, Elsevier, vol. 44(7), pages 870-885, August.
  2. André Palma & Stef Proost & Saskia Loo, 2012. "Network Development Under a Strict Self-Financing Constraint," Networks and Spatial Economics, Springer, vol. 12(1), pages 109-127, March.
  3. Grahn-Voorneveld, Sofia, 2013. "The effects of decentralized capacity decisions for congested self-financed roads," Transportation Research Part A: Policy and Practice, Elsevier, vol. 56(C), pages 49-60.
  4. André De Palma & Mogens Fosgerau, 2010. "Dynamic and Static congestion models: A review," Working Papers hal-00539166, HAL.
  5. Carmona, Miguel, 2010. "The regulatory function in public-private partnerships for the provision of transport infrastructure," Research in Transportation Economics, Elsevier, vol. 30(1), pages 110-125.

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