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Cost Recovery from Congestion Tolls with Long-run Uncertainty

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Author Info

  • Robin Lindsey

    ()
    (Sauder - Sauder School of Business [British Columbia] - University of British Columbia)

  • André De Palma

    ()
    (ENS Cachan - Ecole Normale Supérieure de Cachan - École normale supérieure de Cachan - ENS Cachan)

Abstract

According 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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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00784299.

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Date of creation: 01 Feb 2013
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Handle: RePEc:hal:wpaper:hal-00784299

Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00784299
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Related research

Keywords: Congestion pricing; cost recovery; road capacity; cost uncertainty; demand uncertainty; irreversible investment;

This paper has been announced in the following NEP Reports:

References

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  1. Chen Ng & Kenneth Small, 2012. "Tradeoffs among free-flow speed, capacity, cost, and environmental footprint in highway design," Transportation, Springer, vol. 39(6), pages 1259-1280, November.
  2. 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.
  3. Lindsey, Robin, 2012. "Road pricing and investment," Economics of Transportation, Elsevier, vol. 1(1), pages 49-63.
  4. Odeck, James, 2004. "Cost overruns in road construction--what are their sizes and determinants?," Transport Policy, Elsevier, vol. 11(1), pages 43-53, January.
  5. Robert Bain, 2009. "Error and optimism bias in toll road traffic forecasts," Transportation, Springer, vol. 36(5), pages 469-482, September.
  6. Kraus, Marvin, 1982. "Highway pricing and capacity choice under uncertain demand," Journal of Urban Economics, Elsevier, vol. 12(1), pages 122-128, July.
  7. Lindsey, Robin, 2009. "Cost recovery from congestion tolls with random capacity and demand," Journal of Urban Economics, Elsevier, vol. 66(1), pages 16-24, July.
  8. Hensher, David A. & Goodwin, Phil, 2004. "Using values of travel time savings for toll roads: avoiding some common errors," Transport Policy, Elsevier, vol. 11(2), pages 171-181, April.
  9. Rose, Simon, 1998. "Valuation of Interacting Real Options in a Tollroad Infrastructure Project," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 711-723.
  10. Joseph Berechman & Li Chen, 2011. "Incorporating Risk of Cost Overruns into Transportation Capital Projects Decision-Making," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 45(1), pages 83-103, January.
  11. Pedro Miguel Pimentel & José Azevedo-Pereira & Gualter Couto, 2012. "High-speed rail transport valuation," The European Journal of Finance, Taylor & Francis Journals, vol. 18(2), pages 167-183, February.
  12. Saphores, Jean-Daniel M. & Boarnet, Marlon G., 2006. "Uncertainty and the timing of an urban congestion relief investment.: The no-land case," Journal of Urban Economics, Elsevier, vol. 59(2), pages 189-208, March.
  13. De Vany, Arthur & Saving, Thomas R, 1980. "Competition and Highway Pricing for Stochastic Traffic," The Journal of Business, University of Chicago Press, vol. 53(1), pages 45-60, January.
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