Transport Infrastructure Investment and Demand Uncertainty

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 bene…cial to overinvest 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 ‡exible 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 …nd that overinvestment is less justi…ed because the substitute mode can more easily absorb the high demand outcomes. Keywords: transport infrastructure, uncertainty, investments JEL codes: R41, R42 Acknowledgements and author information * Proost: Department of Economics, Catholic University of Leuven, Naamsestraat 69, B-3000 Leuven, Belgium ([email protected]), + Van der Loo: Department of Economics, Catholic University of Leuven, Naamsestraat 69, B-3000 Leuven, ([email protected]). The second author bene…ted from …nancial support of the FUNDING consortium (6 th Framework Research Program of the EC (6.2)) on the Funding of the Trans European Networks (www.econ.kuleuven.be/funding). We thank Andre de Palma, Patrick Van Cayseele and two anonymous referees for their helpful comments on earlier versions.