A growing number of roads are currently financed by the private sector via Build-Operate-and -Transfer (BOT) schemes. When the franchised road has no close substitute, the government must regulate tolls. Yet when there are many ways of getting from one point to another, regulation may be avoided by allowing competition between several franchise owners. This paper studies toll competition among private roads with congestion. The paper derives two main results. First, we find sufficient conditions for the existence of an equilibrium in pure strategies with strictly positive tolls. Equilibrium congestion is less than optimal, which runs counter to what is expected form price competition. While a lower toll reduces the out-of-pocket cost paid by a user, it increases the congestion cost thereby reducing the drivers' willingness to pay for using the road. Franchise holders partially internalize congestion costs when setting tolls, which softens price competition. Second, when demand and the number of roads increase at the same rate, tolls converge to the socially optimal level -- that is, in the limit equilibrium tolls are just enough to make each driver internalize the congestion externality.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number
0239.
Length: Date of creation: May 1999 Date of revision: Handle: RePEc:nbr:nberte:0239
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Find related papers by JEL classification: R41 - Urban, Rural, and Regional Economics - - Transportation Systems - - - Transportation: Demand, Supply, and Congestion
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Arnott, Richard & de Palma, Andre & Lindsey, Robin, 1990.
"Economics of a bottleneck,"
Journal of Urban Economics,
Elsevier, vol. 27(1), pages 111-130, January.
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