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A New Look at the Two-Mode Problem

  • Marvin Kraus


    (Boston College)

This paper considers the second-best policy problem that arises when auto travel is priced below its marginal cost and there is a substitute mass transit mode. We analyze the problem by combining a model of a rail line based on Kraus and Yoshida (JUE (2002)) with the highway bottleneck model. The model involves a transit authority which optimizes, in addition to the fare, two dimensions of transit capacity. These are (1) the number of train units serving the route and (2) the capacity of an individual train unit. Under a very weak condition, second-best optimality involves expanding both dimensions of transit capacity. The larger of the effects is on train size.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 551.

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Date of creation: 17 Dec 2002
Date of revision:
Publication status: Published, Journal of Urban Economics, 54:3, 511-530, 2003
Handle: RePEc:boc:bocoec:551
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  1. Verhoef, E.T. & Small, K.A., 1999. "Product Differentiation on Roads Second-Best Congestion Pricing with Heterogeneity under Public and Private Ownership," Papers 99-00-01, California Irvine - School of Social Sciences.
  2. Small, Kenneth A. & Yan, Jia, 2001. "The Value of "Value Pricing" of Roads: Second-Best Pricing and Product Differentiation," University of California Transportation Center, Working Papers qt9569k1sz, University of California Transportation Center.
  3. Small, Kenneth A, 1982. "The Scheduling of Consumer Activities: Work Trips," American Economic Review, American Economic Association, vol. 72(3), pages 467-79, June.
  4. d'Ouville, Edmond L. & McDonald, John F., 1990. "Optimal road capacity with a suboptimal congestion toll," Journal of Urban Economics, Elsevier, vol. 28(1), pages 34-49, July.
  5. Sherman, Roger, 1971. "Congestion Interdependence and Urban Transit Fares," Econometrica, Econometric Society, vol. 39(3), pages 565-76, May.
  6. Verhoef, Erik & Nijkamp, Peter & Rietveld, Piet, 1996. "Second-Best Congestion Pricing: The Case of an Untolled Alternative," Journal of Urban Economics, Elsevier, vol. 40(3), pages 279-302, November.
  7. Liu, Louie Nan & McDonald, John F., 1999. "Economic efficiency of second-best congestion pricing schemes in urban highway systems," Transportation Research Part B: Methodological, Elsevier, vol. 33(3), pages 157-188, April.
  8. Richard Arnott & Andre de Palma & Robin Lindsey, 1985. "Economics of a Bottleneck," Working Papers 636, Queen's University, Department of Economics.
  9. AndrÊ de Palma & Robin Lindsey, 2000. "Private toll roads: Competition under various ownership regimes," The Annals of Regional Science, Springer, vol. 34(1), pages 13-35.
  10. Wilson, John D., 1983. "Optimal road capacity in the presence of unpriced congestion," Journal of Urban Economics, Elsevier, vol. 13(3), pages 337-357, May.
  11. Kraus, Marvin & Yoshida, Yuichiro, 2002. "The Commuter's Time-of-Use Decision and Optimal Pricing and Service in Urban Mass Transit," Journal of Urban Economics, Elsevier, vol. 51(1), pages 170-195, January.
  12. Braid, Ralph M., 1996. "Peak-Load Pricing of a Transportation Route with an Unpriced Substitute," Journal of Urban Economics, Elsevier, vol. 40(2), pages 179-197, September.
  13. Liu, Louie Nan & McDonald, John F., 1998. "Efficient Congestion Tolls in the Presence of Unpriced Congestion: A Peak and Off-Peak Simulation Model," Journal of Urban Economics, Elsevier, vol. 44(3), pages 352-366, November.
  14. Small, Kenneth A., 2001. "The Value of Pricing," University of California Transportation Center, Working Papers qt0rm449sx, University of California Transportation Center.
  15. Richard Arnott & An Yan, 2000. "The Two-Mode Problem: Second-Best Pricing and Capacity," Boston College Working Papers in Economics 474, Boston College Department of Economics.
  16. William C. Wheaton, 1978. "Price-Induced Distortions in Urban Highway Investment," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 622-632, Autumn.
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