Pricing and investment in alternative transport infrastructures

Abstract

Pricing and investment decisions are not independent; causality in the relationship cuts both ways. Optimal prices, once the investment has been made and is irreversible, are quite different compared with the situation contemplated in the ex-ante evaluation of the project, when no cost is already sunk, and various capacity options are still open. This paper deals with this critical aspect of the relationship in the planning process, when deciding on alternative transport infrastructures. Pricing affects demand and, hence, social welfare. The social profitability of the project can vary significantly depending on the pricing policy. Therefore, before deciding whether it is socially worthwhile to invest in a project, the government needs to be clear about the charging scheme that will be applied. In this paper we show that, when comparing different transport alternatives, a particular charging scheme may favor the creation of a particular transport infrastructure network, leading to irreversible long-term equilibria that would not be optimal under other charging schemes.