Capacity cost structure, welfare and cost recovery: Are transport infrastructures with high fixed costs a handicap?

Bruno De Borger, Fay Dunkerley and Stef Proost

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: In this paper, we consider a region that invests in infrastructure used by both local demand and through transport. We then compare transport systems that have, for a given capacity, the same total infrastructure cost but vary in the proportion of fixed costs and variable capacity costs. We show, first, that infrastructure which has (ceteris paribus) a higher share of fixed costs leads to higher welfare for the regional government building it. Contrary to what is commonly believed, it therefore requires less, rather than more, federal subsidies. Second, we find that, even for capacity characterized by, ceteris paribus, very high shares of fixed costs, financing of infrastructure is generally not an important issue as long as regions are allowed to toll through traffic. Third, if member states cannot toll through traffic, or if a federal authority (such as the EU or the USA) can impose pricing at the global marginal social cost, our analysis shows that this reduces investment incentives for the individual regions, and subsidies may be needed. We discuss the policy implications of these findings and illustrate all theoretical results numerically.

Keywords: Capacity cost structure; Cost recovery; Transport investment (search for similar items in EconPapers)
JEL-codes: R41 R48 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008-01
New Economics Papers: this item is included in nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Capacity cost structure, welfare and cost recovery: Are transport infrastructures with high fixed costs a handicap? (2009)
Working Paper: Capacity cost structure, welfare and cost recovery: are transport infrastructures with high fixed costs a handicap? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:2008001

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