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Economics of Road Network Ownership

  • Lei Zhang
  • David Levinson

    ()

    (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota)

This paper seeks to understand the economic impact of centralized and decentralized ownership structures and their corresponding pricing and investment strategies on transportation network performance and social welfare for travelers. In a decentralized network economic system, roads are owned by many agencies or companies that are responsible for pricing and investment strategies. The motivation of this study is two-fold. First, the question of which ownership structure, or industrial organization, is optimal for transportation networks has yet to be resolved. Despite several books devoted to this research issue, quantitative methods that translate ownership-related policy variables into short- and long-run network performance are lacking. Second, the U.S. and many other countries have recently seen a slowly but steadily increasing popularity of road pricing as an alternative to traditional fuel taxes. Not only is the private sector encouraged to finance new roads, this transition in revenue mechanism also makes it possible for lower-level government agencies and smaller jurisdictions to participate in network pricing and investment practice. The issue of optimal ownership is no longer a purely theoretical debate, but bears practical importance. This research adopts an agent-based simulator of network dynamics to explore the implications of centralized and decentralized ownership on mobility and social welfare, as well as potential financial issues and regulatory needs. Components of the simulator: the travel demand model, cost functions, and key variables of pricing and investment strategies, are empirically estimated and validated. Results suggest that road network is a market with imperfect competition. While there is a significant performance lag between the optimal strategy and the current network financing practice in the U.S. (characterized by centralized control, fuel taxes, and budget-balancing investment), a completely decentralized network suffers from issues such as higher-than-optimal tolls and over-investment. For the decentralized ownership structure, appropriate regulation on pricing and investment practices is necessary. Further analysis based on simulation comparisons suggests that with appropriate price regulation, a decentralized road economy consisting of profit-seeking road owners could outperform the existing centralized control, achieve net social benefits close to the theoretical optimum, and distribute a high percentage of welfare gains to travelers. Decentralized control is especially valuable in rapidly changing environments because it promptly responds to travel demand. These results seem to favor the idea of privatizing or decentralizing road ownership on congested networks. Further tests on real-world transportation networks are necessary and should make an interesting future study.

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File URL: http://nexus.umn.edu/Papers/ERNO.pdf
File Function: First version, 2007
Download Restriction: no

Paper provided by University of Minnesota: Nexus Research Group in its series Working Papers with number 200908.

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Date of creation: 2006
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Publication status: Published in International Journal of Sustainable Transportation Sept. 2009 3(5) pp. 339-359.
Handle: RePEc:nex:wpaper:erno
Contact details of provider: Postal: Dept. of Civil Engineering, 500 Pillsbury Drive SE, Minneapolis, MN 55455
Phone: +01 (612) 625-6354
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Web page: http://nexus.umn.edu

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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, vol. 34(1), pages 13-35.
  2. Small, K.A. & Yan, J., 1999. "The Value of "Value Princing" of Roads: Second-Best Pricing and Product Differentiation," Papers 99-00-02, California Irvine - School of Social Sciences.
  3. Arnott, Richard & de Palma, Andre & Lindsey, Robin, 1992. "Route choice with heterogeneous drivers and group-specific congestion costs," Regional Science and Urban Economics, Elsevier, vol. 22(1), pages 71-102, March.
  4. Lei Zhang & David Levinson, 2004. "Pricing, Investment, and Network Equilibrium," Working Papers 000032, University of Minnesota: Nexus Research Group.
  5. Small, Kenneth A., 2001. "The Value of Pricing," University of California Transportation Center, Working Papers qt0rm449sx, University of California Transportation Center.
  6. Safirova, Elena & Gillingham, Kenneth, 2003. "Measuring Marginal Congestion Costs of Urban Transportation: Do Networks Matter?," Discussion Papers dp-03-56, Resources For the Future.
  7. de Palma, Andre, 1992. "A Game-Theoretic Approach to the Analysis of Simple Congested Networks," American Economic Review, American Economic Association, vol. 82(2), pages 494-500, May.
  8. David Levinson & Ramachandra Karamalaputi, 2003. "Induced Supply: A Model of Highway Network Expansion at the Microscopic Level," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 37(3), pages 297-318, September.
  9. David Levinson & David Gillen, 1997. "The Full Cost of Intercity Highway Transportation," Working Papers 199704, University of Minnesota: Nexus Research Group.
  10. 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.
  11. Viton Philip A., 1995. "Private Roads," Journal of Urban Economics, Elsevier, vol. 37(3), pages 260-289, May.
  12. André DE PALMA & Luc LERUTH, 1989. "Congestion and Game in Capacity: a Duopoly Analysis in the Presence of Network Externalities," Annales d'Economie et de Statistique, ENSAE, issue 15-16, pages 389-407.
  13. Lei Zhang & David Levinson, 2006. "The Economics of Transportation Network Growth," Working Papers 200710, University of Minnesota: Nexus Research Group.
  14. Bar-Gera, Hillel & Boyce, David, 2003. "Origin-based algorithms for combined travel forecasting models," Transportation Research Part B: Methodological, Elsevier, vol. 37(5), pages 405-422, June.
  15. Yang, Hai & Tang, Wilson H. & Man Cheung, Wing & Meng, Qiang, 2002. "Profitability and welfare gain of private toll roads in a network with heterogeneous users," Transportation Research Part A: Policy and Practice, Elsevier, vol. 36(6), pages 537-554, July.
  16. David Levinson, 2000. "Revenue Choice on a Serial Network," Working Papers 200001, University of Minnesota: Nexus Research Group.
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