Cost recovery from congestion tolls with long-run uncertainty

According to the Cost Recovery Theorem the revenues from optimal congestion tolls pay for the capacity costs of an optimal-sized facility if capacity is perfectly divisible, and if user costs and capacity costs have constant scale economies. This paper extends the theorem to long-run uncertainty about investment costs, user costs, and demand. It proves that if constant scale economies hold at all times and in all states, and if the toll can be varied freely over time and by state, then expected discounted congestion toll revenues cover expected discounted investment costs over a facility׳s lifetime. If the marginal cost of investment is constant and investment is reversible, expected cost recovery also holds for each investment. If demand is relatively price inelastic, cost recovery is sensitive to estimated initial demand and estimated growth rate of demand. Natural variability in demand can result in substantial surpluses or deficits over a facility׳s lifetime.