COMPETITION‐ACCELERATING PUBLIC INVESTMENTS*

Toshihiro Matsumura

Australian Economic Papers, 2005, vol. 44, issue 3, 269-274

Abstract: We investigate the effects of infrastructure investments that reduce transport costs. We use a spatial model of Salop (1979). It is well known that the number of firms is excessive at free‐entry equilibrium (excess entry theorem). We find that the optimal investment level exceeds the ex post cost‐minimising level because investments accelerate competition and reduce the number of entering firms; resulting in the improvement of welfare. We also show that, in cases where the excess‐entry theorem is true, the desirable policy is the one accelerating, rather than restricting, competition.

Date: 2005
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https://doi.org/10.1111/j.1467-8454.2005.00264.x

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