Cost recovery of congested infrastructure under market power

Research output: Contribution to JournalArticleAcademicpeer-review

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.

Original languageEnglish
Pages (from-to)45-56
Number of pages12
JournalJournal of Urban Economics
Volume101
DOIs
Publication statusPublished - 1 Sep 2017

Fingerprint

cost recovery
market power
infrastructure
market
proportionality
costs
airport
cost
subsidy
elasticity
social isolation
pricing
budget
economy
demand
congestion
financing
Market power
Cost recovery
Self-financing

Keywords

  • Airport congestion
  • Capacity choice
  • Congestion pricing
  • Market power
  • Self-financing infrastructure

Cite this

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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.",
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Cost recovery of congested infrastructure under market power. / Verhoef, Erik T.

In: Journal of Urban Economics, Vol. 101, 01.09.2017, p. 45-56.

Research output: Contribution to JournalArticleAcademicpeer-review

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