Capacity cost structure, welfare and cost recovery: Are transport infrastructures with high fixed costs a handicap?

In this paper, we consider a region that invests in infrastructure used by both local demand and through traffic. We then compare transport systems that have, for a given capacity, the same total infrastructure cost but vary in the proportion of fixed costs and variable capacity costs. We show that, compared to a benchmark infrastructure which has zero fixed costs, an infrastructure which has (ceteris paribus) a higher share of fixed costs leads to higher welfare for the regional government building it. Moreover, we find that, even for capacity characterized by very high shares of fixed costs, financing of infrastructure is generally not an important issue as long as regions are allowed to toll through traffic. Finally, we show that, compared to the benchmark technology without fixed costs, regions are more likely to make a particular transport investment if they can chose a technology with higher fixed costs. As a corollary, projects with a higher share of fixed costs do not necessarily require higher federal subsidies.