Abstract

This paper explores the interrelations between pricing, capacity choice and financingin transportation networks. It builds on the famous Mohring-Harwitz result on self-financing ofoptimally designed roads under optimal congestion pricing, and specifically investigates itsins and outs in a network environment and under various types of second-best regulation. Thepaper develops a small network model, with endogenous car-ownership, in order to study thesequestions both from an analytical and a numerical viewpoint. It is for instance shown thatapplication of the principle over an entire network may cause user prices to increase morestrongly in initially mildly congested areas compared to heavily congested areas, and that aflat kilometre charge, provided accompanied with optimal capacity policies, may result infirst-best efficiency gains.

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. © 2009 Elsevier Ltd.