Long-Run Evaluation of Cost-Reducing Public Infrastructure Investment

Toshihiro Matsumura and Atsushi Yamagishi

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate public infrastructure investment that reduces production costs in oligopoly markets. The government decides on its public investment based on cost/benefit analysis that estimates the benefit as a reduction in production costs. In the short run, equilibrium investment falls short of the social optimum level (i.e. underinvestment) because it neglects the welfare gain of the subsequent production expansion. In the long run, equilibrium investment may exceed the social optimum level (i.e. overinvestment), depending on the demand and cost functions. This simple cost/benefit measure is thus conservative in the short run, but may not be from the long-run viewpoint.

Keywords: cost-reducing public investment; free entry market; excessive investment (search for similar items in EconPapers)
JEL-codes: D61 H54 L13 (search for similar items in EconPapers)
Date: 2016-09-08
New Economics Papers: this item is included in nep-tre and nep-ure
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