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Private Road Networks with Uncertain Demand

Author

Listed:
  • Xinying Fu

    () (VU Amsterdam, The Netherlands)

  • Vincent A.C. van den Berg

    () (VU Amsterdam, The Netherlands)

  • Erik T. Verhoef

    () (VU Amsterdam, The Netherlands)

Abstract

We study the efficiency of private supply of roads under demand uncertainty and evaluate various regulatory policies. Due to demand uncertainty, capacity is decided before demand is known, but tolls can be adjusted after demand is known. Policy implications can differ considerably from those under deterministic demand. For instance, for serial links, the toll in the second-best zero-profit case is no longer equal to the marginal external congestion cost. In the first-best scenario, the capacity under uncertain demand is higher than that under deterministic demand of the same expected value, though self-financing still holds in expected terms. Regulation by competitive auction cannot replicate the second-best zero-profit result and thus leads to a lower welfare, whereas without uncertainty various forms of competitive auctions can attain this second-best optimum. For more complex networks, when private firms add capacity in turn, contrary to the case without demand uncertainty, some form of auction performs better than others with demand uncertainty.

Suggested Citation

  • Xinying Fu & Vincent A.C. van den Berg & Erik T. Verhoef, 2017. "Private Road Networks with Uncertain Demand," Tinbergen Institute Discussion Papers 17-026/VIII, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20170026
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    References listed on IDEAS

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    Cited by:

    1. Sioshansi, Fereidoon P., 2015. "Electricity utility business not as usual," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 1-11.

    More about this item

    Keywords

    Traffic Congestion; Road Pricing; Uncertain Demand; Road Network; Private Supply; Auction;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

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