On Whom the Toll Falls: A Model of Network Financing by David Matthew Levinson B. (Georgia Institute of Technology) 1988 M. (University of Maryland) 1992 A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Engineering - Civil Engineering in the GRADUATE DIVISION of the UNIVERSITY OF CALIFORNIA, BERKELEY Committee in charge: Professor Mark M. Hansen, Chair Professor David Gillen Professor Carlos Daganzo Professor Elizabeth Deakin Spring 1998 The dissertation of David Matthew Levinson is approved: ________________________________________________________________________ Chair Date ________________________________________________________________________ Date ________________________________________________________________________ Date ________________________________________________________________________ Date University of California, Berkeley Spring 1998 On Whom the Toll Falls: A Model of Network Financing Copyright 1998 by David Matthew Levinson Abstract On Whom the Toll Falls: A Model of Network Financing by David Matthew Levinson Doctor of Philosophy in Civil Engineering University of California, Berkeley Professor Mark M. Hansen, Chair This dissertation examines why and how jurisdictions choose to finance their roads. The systematic causes of revenue choice are explored qualitatively by examining the history of turnpikes. The question is approached analytically by employing game theory to model revenue choice on a long road. The road is covered by a series of jurisdictions seeking to maximize local welfare. Jurisdictions are responsible for building and maintaining the local network. Complexity arises because local network users may not be local residents, and local residents may use non-local networks. Key factors posited to explain the choice of revenue mechanism include the length of trips using the road, the size of the governing jurisdiction, the degree of excludability, and the transaction costs of toll collection. These factors dictate the size and scope of the free rider problem. It is hypothesized that smaller jurisdictions and lower collection costs favor tolling policies over taxes. The analytical model is operationalized by assuming jurisdictions have two decisions: the strategic decision to tax or toll, and the tactical decision of setting the rate of tax or toll. Models of user demand as a function of trip distance and monetary cost and of network costs as a function of traffic flow and the number of toll collections are specified. The values of the constants and coefficients of the model are developed from recent cost literature and the estimation of a model of collection costs from California Toll Bridge data. The model is applied to evaluate the dissertation’s hypotheses. The application evaluates the welfare implications of a jurisdiction and its neighbors imposing general tax, cordon toll, odometer tax, or perfect toll policies. Sensitivity tests of the model under alternative behavioral assumptions, and with varying model coefficients are conducted. Finally, policy implications from the analysis are drawn. The general trends which bode well for road pricing (electronic toll collection (ETC), decentralization, advanced infrastructure, privatization, and federal rules) are established. Possible scenarios for three cases are presented: deploying ETC and building new toll roads, and converting free roads. ____________________________________________ Mark Hansen, Chair 1 Dedication To Trinh and Roslyn, whose blind faith have seen me through. iii TABLE OF CONTENTS 1. CHAPTER ONE: INTRODUCTION..............................................................................1 1.1 Introduction ................................................................................................................1 1.2 Rationales for Road Pricing........................................................................................3 1.2.1 Financing Infrastructure.......................................................................................3 1.2.2 Social Costs.........................................................................................................8 1.2.3 Change in Tax Base with Alternative Fuels........................................................11 1.2.4 Congestion Pricing ............................................................................................12 1.3 Research Overview....................................................................................................14 2. CHAPTER TWO: ROAD PRICING IN PRACTICE ...................................................18 2.1 Introduction ..............................................................................................................18 2.2 Tolls in the Ancient and Medieval World..................................................................21 2.3 Roads Before Modern Turnpikes .............................................................................22 2.4 Turnpikes in Great Britain: 1656 - 1900...................................................................25 2.5 Turnpikes in America: 1785 - 1900 ..........................................................................30 2.6 Turnpikes in America: 1900 - Present.......................................................................39 2.7 Recent International Experience................................................................................45 2.8 Summary And Conclusions......................................................................................48 3. CHAPTER THREE: THEORY ......................................................................................51 3.1 Introduction ..............................................................................................................51 3.2 Property Rights.........................................................................................................52 3.3 Actions......................................................................................................................53 3.4 Objectives .................................................................................................................55 3.5 Profit.........................................................................................................................56 3.6 Consumers’ Surplus.................................................................................................58 3.7 Free Riders and Cross Subsidies..............................................................................59 3.8 Game Theory............................................................................................................61 3.9 Summary and Conclusions.......................................................................................65 4. CHAPTER FOUR: A MODEL OF NETWORK FINANCING...................................67 4.1 Introduction ..............................................................................................................67 4.2 Network Geometry ...................................................................................................69 4.3 User Classes.............................................................................................................69 4.4 Jurisdiction Objectives..............................................................................................72 4.5 Consumption ............................................................................................................74 4.5.1 Demand .............................................................................................................74 iv 4.5.2 Consumers’ surplus ..........................................................................................77 4.6 Production ................................................................................................................79 4.6.1 Profit..................................................................................................................79 4.6.2 Cost ...................................................................................................................80 4.6.3 Revenue .............................................................................................................81 4.7 Policies .....................................................................................................................82 4.7.1 Environment.......................................................................................................83 4.7.2 Jurisdiction Policies...........................................................................................84 4.8 Toll-Setting...............................................................................................................89 4.8.1 Non-cooperative Toll-setting..............................................................................89 4.8.2 Cooperative Toll-setting.....................................................................................90 4.9 Mathematical Solution ..............................................................................................91 4.9.1 General Tax and Cordon Tolls...........................................................................92 4.9.2 Odometer Tax....................................................................................................96 4.9.3 Perfect Toll ........................................................................................................97 4.10 Summary and Conclusions.....................................................................................98