Capacity Cost Structure, Welfare and Cost Recovery: Are Transport Infrastructures with High Fixed Costs a Handicap?

33 Pages Posted: 17 Jan 2008

See all articles by Bruno De Borger

Bruno De Borger

University of Antwerp - Department of Economics

Fay Dunkerley

KU Leuven - Department of Economics

Stef Proost

KU Leuven - Department of Economics

Date Written: January 2008

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

JEL Classification: R41, R48

Suggested Citation

De Borger, Bruno and Dunkerley, Fay and Proost, Stef V., Capacity Cost Structure, Welfare and Cost Recovery: Are Transport Infrastructures with High Fixed Costs a Handicap? (January 2008). Available at SSRN: https://ssrn.com/abstract=1084816 or http://dx.doi.org/10.2139/ssrn.1084816

Bruno De Borger (Contact Author)

University of Antwerp - Department of Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium
+32/3/220.40.31 (Phone)
+32/3/220.47.99 (Fax)

Fay Dunkerley

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Stef V. Proost

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium
016 32 66 35 (Phone)
016 32 67 96 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
57
Abstract Views
606
rank
401,883
PlumX Metrics