Transport Infrastructure Investment and Demand Uncertainty

20 Pages Posted: 4 Mar 2008

See all articles by Stef Proost

Stef Proost

KU Leuven - Department of Economics

Saskia Van Der Loo

Katholieke Universiteit Leuven. KUL. Faculty of Business and Economics

Date Written: February 2008

Abstract

In transportation planning there can be long lead times to adapt capacity. This paper addresses two questions. First, in a one mode world (say rail or road), what is the optimal capacity choice when faced with uncertain demand, long lead times and congestion. Using a simple analytical model it is shown that when demand is inelastic, it is socially optimal to invest more than if only the expected level of demand is taken into account. In this case it may be beneficial to over invest in capacity because congestion costs are a convex function of relative use. This result holds with or without optimal tolling. The second question deals with two competing modes and where only one mode has long lead times for capacity while the other has flexible capacity. This is typical for the competition between High Speed Rail and air for the medium distance trips (500 to 1000 km), or for the competition between inland waterways and trucks for freight. We find that over investment is less justified because the substitute mode can more easily absorb the high demand outcomes.

Keywords: transport infrastructure, uncertainty, investments

JEL Classification: R41, R42

Suggested Citation

Proost, Stef V. and Van Der Loo, Saskia, Transport Infrastructure Investment and Demand Uncertainty (February 2008). Available at SSRN: https://ssrn.com/abstract=1101307 or http://dx.doi.org/10.2139/ssrn.1101307

Stef V. Proost (Contact Author)

KU Leuven - Department of Economics ( email )

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

Saskia Van Der Loo

Katholieke Universiteit Leuven. KUL. Faculty of Business and Economics ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
139
Abstract Views
1,039
rank
279,996
PlumX Metrics