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Pricing, capacity and long-run cost functions for first-best and second-best network problems

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  • Verhoef, Erik T.
  • Koh, Andrew
  • Shepherd, Simon

Abstract

This paper considers the use of 'long-run cost functions' for congested networks in solving second-best network problems, in which capacity and tolls are instruments. We derive analytical results both for general cost and demand functions and for specific functional forms, namely Bureau of Public Roads cost functions and constant-elasticity demand functions. The latter are also used in a numerical simulation model. We consider second-best cases where only a sub-set of links in a network is subject to tolling and/or capacity choice, and cases with and without a self-financing constraint imposed. We will demonstrate that, under certain assumptions, second-best long-run cost (or actually: generalized price) functions can be derived for most of the cases of interest, which can be used in an applied network model as a substitute for the conventional short-run user cost functions. Doing so reduces the dimensionality of the problem and should therefore be helpful in speeding up procedures for finding second-best optima.

Suggested Citation

  • Verhoef, Erik T. & Koh, Andrew & Shepherd, Simon, 2010. "Pricing, capacity and long-run cost functions for first-best and second-best network problems," Transportation Research Part B: Methodological, Elsevier, vol. 44(7), pages 870-885, August.
  • Handle: RePEc:eee:transb:v:44:y:2010:i:7:p:870-885
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    1. AndrÊ de Palma & Robin Lindsey, 2000. "Private toll roads: Competition under various ownership regimes," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 34(1), pages 13-35.
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    Cited by:

    1. repec:kap:transp:v:44:y:2017:i:4:d:10.1007_s11116-015-9674-2 is not listed on IDEAS
    2. Tan, Zhijia & Yang, Hai & Tan, Wei & Li, Zhichun, 2016. "Pareto-improving transportation network design and ownership regimes," Transportation Research Part B: Methodological, Elsevier, vol. 91(C), pages 292-309.
    3. repec:eee:apmaco:v:266:y:2015:i:c:p:390-403 is not listed on IDEAS
    4. Wu, Di & Yin, Yafeng & Lawphongpanich, Siriphong, 2011. "Optimal selection of build–operate-transfer projects on transportation networks," Transportation Research Part B: Methodological, Elsevier, vol. 45(10), pages 1699-1709.
    5. Watling, D.P. & Shepherd, S.P. & Koh, A., 2015. "Cordon toll competition in a network of two cities: Formulation and sensitivity to traveller route and demand responses," Transportation Research Part B: Methodological, Elsevier, vol. 76(C), pages 93-116.
    6. Lindsey, Robin, 2012. "Road pricing and investment," Economics of Transportation, Elsevier, vol. 1(1), pages 49-63.
    7. Wang, Guangmin & Gao, Ziyou & Xu, Meng & Sun, Huijun, 2014. "Joint link-based credit charging and road capacity improvement in continuous network design problem," Transportation Research Part A: Policy and Practice, Elsevier, vol. 67(C), pages 1-14.
    8. repec:eee:transb:v:102:y:2017:i:c:p:105-123 is not listed on IDEAS

    More about this item

    Keywords

    Traffic congestion Road pricing Road capacity choice Second-best Networks;

    JEL classification:

    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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