Is transportation infrastructure cost recoverable under the risk of disasters?

This study examines cost recoverability, or whether or not the expected revenue from the optimal congestion toll exceeds the cost of optimal investment in transportation infrastructure, when its capacity is uncertain owing to significantly large disasters whose loss cannot be hedged, either by any saving or insurance. The government controls the degree of reliability of the entire transportation system by combining two types of infrastructure, namely, unstable infrastructure, whose capacity decreases when a disaster occurs, and stable infrastructure, whose capacity is constant regardless of the occurrence of disaster. Under the assumption of risk-averse preferences of households, the theorem of cost recovery does not hold even if the congestion toll is controlled in a completely flexible manner, given any incidents. The optimally designed unstable (stable) infrastructure is (not) cost recoverable because the benefit of investment mitigating the risk premium in social welfare is not covered by the revenue of the congestion toll. We also show that if the transportation cost is specified by a linear function, The entire transportation infrastructure is not cost recoverable, if price elasticity of transport demand is less than one, as many empirical studies have shown.