Chapter 8: Finance Choice on an Interstate
INTRODUCTION The previous chapter examined financing on a beltway. The model was simple in that demand was insensitive to price or travel time, jurisdictions were of specific size, jurisdictions could only cover costs, and it was solved with discrete rather than continuous mathematics (algebra rather than calculus). This chapter extends that introductory model by considering an interstate highway that covers multiple jurisdictions, each serving a local objective. As in the previous chapter, the main complication is the joint production and consumption of the key good (network services) by the jurisdiction and its residents. The network operator (’jurisdiction) makes the network available while residents consume the network for traveling. Spatial complexity in this problem ensues because jurisdiction residents use both local and non-local networks, and each jurisdiction’s network is used by both local and non-local residents. The network is not perfectly competitive and thus retains some monopoly power. The degree of locality in the use of the network directly shapes the local welfare resulting from a particular revenue mechanism, and itself is a function of jurisdiction size. The choice of financing instrument must trade off the number of spatial free riders - system users who do not pay their cost because of the location and the costs of collection. However, in this chapter, the price charged for a given instrument is limited by the elasticity of demand on those who are charged. In this chapter a model of network financing is developed which incorporates the basic features of the economic structure...
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