EFFICIENCY LOSS OF PRIVATE ROAD WITH CONTINUOUSLY DISTRIBUTED VALUE-OF-TIME

Abstract

As commercial and private provision of roads was used to finance modern road systems, many intriguing issues have emerged, such as the strategy of a private firm in determining road supply and pricing in a network and, more importantly, the resulting inefficiency when profit-oriented behavior substitutes for government regulation. This paper examines the likely bias of a monopoly market away from the social optimum under the more realistic assumption that each trip-maker has a unique value-of-time (VOT). The efficiency loss and the road capacity and/or toll set by a monopolist are investigated under different kinds of government regulatory regimes. Due to the informational difficulty of accurately valuating the VOT over all the trip-makers, the paper suggests that rate-of-return regulation may have attractive advantages for the regulatory authority.