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Damned If You Do, Damned If You Don't: An Option Value Approach to Evaluating the Subsidy of the CPR Mainline

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  • J. C. Herbert Emery
  • Kenneth J. McKenzie

Abstract

We revisit the 'excess subsidy' granted to the CPR for the first transcontinental railway in 1881. Previous studies have evaluated the subsidy from an ex post perspective, and concluded that it was 'too large.' We argue that the subsidy should be evaluated from an ex ante perspective, which explicitly accounts for uncertainty. Using an option value approach, which takes account of the risk and irreversibility of the investment, we show that it is likely that the subsidy was not excessive at all, but rather was required to compensate the CPR for forgoing the option to construct the line at the privately optimal time in the future.

Suggested Citation

  • J. C. Herbert Emery & Kenneth J. McKenzie, 1996. "Damned If You Do, Damned If You Don't: An Option Value Approach to Evaluating the Subsidy of the CPR Mainline," Canadian Journal of Economics, Canadian Economics Association, vol. 29(2), pages 255-270, May.
  • Handle: RePEc:cje:issued:v:29:y:1996:i:2:p:255-70
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    References listed on IDEAS

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    1. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 119-128.
    2. Lloyd, P. J. & Schweinberger, A. G., 1988. "Trade expenditure functions and the gains from trade," Journal of International Economics, Elsevier, vol. 24(3-4), pages 275-297, May.
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    Cited by:

    1. Viju, Crina & Kerr, William A., 2013. "Taking an option on the future: Subsidizing biofuels for energy security or reducing global warming," Energy Policy, Elsevier, vol. 56(C), pages 543-548.
    2. Lew, Byron, 2000. "The Diffusion of Tractors on the Canadian Prairies: The Threshold Model and the Problem of Uncertainty," Explorations in Economic History, Elsevier, vol. 37(2), pages 189-216, April.
    3. Machiel Mulder & Gijsbert Zwart, 2006. "Government involvement in liberalised gas markets; a welfare-economic analysis of Dutch gas-depletion policy," CPB Document 110, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Viju, Crina & Kerr, William A., 2010. "Is The Subsidy For Biofuels The Way To Go?," 14th ICABR Conference, June 16-18, 2010, Ravello, Italy 188117, International Consortium on Applied Bioeconomy Research (ICABR).
    5. Kerr, William A., 2014. "Food Security and Trade: Some Supply Conundrums for 2050," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 15(2).

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