Pricing and Investment Decisions for a Tollway with Possible Route Substitution onto Alternative Congested Roads.

Socially optimal pricing and investment decisions are analysed for a tollway that experiences competition from unpriced, congested roads. The resulting "second-best" problem has a simple qualitative structure: optimal tolls are set lower than they would be without the unpriced congestion. The impact of such low tolls would be to induce higher levels of tollway traffic demand than would occur without route substitution possibilities. However, such demands are offset by installing less capacity than would be installed without route substitution. Copyright 2000 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia