A Cost Function Approach for Measuring the Marginal Cost of Road Maintenance

This paper analyses the relationship between traffic volume and maintenance costs, and derives estimates for the cost elasticity and the marginal maintenance cost for pricing decisions. Two types of multi-output cost functions were estimated: a translog form and a hybrid form with output variables transformed by Box-Cox metrics. The hybrid model performs statistically better and is the preferable model for the application in this paper. Both approaches derive a decreasing cost elasticity curve and marginal cost curve. The paper also provides evidence for low-factor substitutability, price-inelastic factor demands, and constant returns to scale in the process of maintaining roads. © 2014 LSE and the University of Bath