Cost Recovery from Congestion Tolls with Long-run Uncertainty
AbstractAccording to the seminal Cost Recovery Theorem the revenues from congestion tolls pay for the capacity costs of an optimal-sized facility if capacity is perfectly divisible, and if user costs and capacity costs have constant scale economies. This paper extends the Theorem to long-run uncertainty about investment costs, user costs, and demand. It proves that if constant scale economies hold at all times and in all states, and if the toll can be varied freely over time and by state, then expected discounted toll revenues cover expected discounted investment costs over a facility's lifetime. If the marginal cost of investment is constant and investment is reversible, then expected cost recovery is also achieved for each investment. Cost recovery is quite sensitive to estimated initial demand, and moderately sensitive to the estimated growth rate of demand. Natural variability in demand can result in substantial surpluses or deficits over a facility's lifetime.
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Date of creation: 01 Feb 2013
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Congestion pricing; cost recovery; road capacity; cost uncertainty; demand uncertainty; irreversible investment;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-08 (All new papers)
- NEP-COM-2013-02-08 (Industrial Competition)
- NEP-PPM-2013-02-08 (Project, Program & Portfolio Management)
- NEP-TRE-2013-02-08 (Transport Economics)
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