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Cost recovery of congested infrastructure under market power

Erik Verhoef ()

Journal of Urban Economics, 2017, vol. 101, issue C, 45-56

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.

Keywords: Congestion pricing; Capacity choice; Self-financing infrastructure; Market power; Airport congestion (search for similar items in EconPapers)
JEL-codes: R41 R48 D62 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Cost Recovery of Congested Infrastructure under Market Power (2012) Downloads
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