Self-Financing Roads

Tinbergen Institute Discussion Paper No. 2007-068/3

22 Pages Posted: 6 Sep 2007

See all articles by Erik T. Verhoef

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics; Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Herbert Mohring

affiliation not provided to SSRN

Date Written: September 2007

Abstract

Mohring and Harwitz (1962) showed that, under certain conditions, an optimally designed and priced road would generate user toll revenues just sufficient to cover its capital costs. Several scholars subsequently explored the robustness of that finding. This paper briefly summarizes further research on the relationship between congestion-toll revenues and road costs. Despite its transparency, the self-financing theorem can lead to erroneous interpretations. The paper's second part discusses three such possible fallacies. It uses a simple numerical model to investigate them. The model shows that the naïve interpretation of the Mohring-Harwitz rule may lead to substantial welfare losses. These losses are particularly prominent when the difference between capital and investment cost is confused and when balanced-budget constraints are imposed under second-best network conditions. In contrast, losses from imposing a balanced-budget constraint when economies or diseconomies of scale exist are surprisingly small.

Keywords: Traffic congestion, Road pricing, Road capacity choice, Road financing

JEL Classification: R41, R48, D62

Suggested Citation

Verhoef, Erik T. and Mohring, Herbert, Self-Financing Roads (September 2007). Tinbergen Institute Discussion Paper No. 2007-068/3, Available at SSRN: https://ssrn.com/abstract=1012308 or http://dx.doi.org/10.2139/ssrn.1012308

Erik T. Verhoef (Contact Author)

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 020 4446094 (Phone)
+31 020 4446004 (Fax)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Herbert Mohring

affiliation not provided to SSRN ( email )

No Address Available

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