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Cost recovery of congested infrastructure under market power

Journal article
Authors Erik T. Verhoef
Published in Journal of Urban Economics
Volume 101
Pages 45-56
ISSN 0094-1190
Publication year 2017
Published at Department of Economy and Society
Pages 45-56
Language English
Links doi.org/10.1016/j.jue.2017.06.004
Keywords Congestion pricing, Capacity choice, Self-financing infrastructure, Market power, Airport congestion, public-goods, airport congestion, private provision, tax competition, capacity, investment, carriers, tolls, Business & Economics, Urban Studies
Subject categories Economics and Business

Abstract

The Mohring-Harwitz (1962) theorem states that the degree of self-financing of congested infrastructure is equal to the elasticity of the capacity cost function in the optimum, so that under neutral scale economies exact self-financing applies. The theorem breaks down when the infrastructure is used by operators with market power, the case in point often being airlines at a congested airport. This paper proposes a regulatory scheme that restores self-financing in such cases; partially so in general, and perfectly so under specific circumstances that include (1) the satisfaction of a particular proportionality condition, and (2) either the isolation of budgets needed for subsidies to counter demand-related mark-ups, or perfectly elastic demands so that such mark-ups are zero. Moreover, exact self-financing applies in this scheme independent of the elasticity of the capacity cost function, and occurs for both parametric and "manipulable" congestion pricing. (C) 2017 Elsevier Inc. All rights reserved.

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