Tolling at a Frontier: A Game Theoretic Analysis

Abstract

Frontiers provide an opportunity for one jurisdiction to remedy inequities (and even exploit them) in highway finance by employing toll-booths, and thereby ensuring the highest possible share of revenue from non-residents. If one jurisdiction sets policy in a vacuum, it is clearly advantageous to impose as high a toll on non-residents as can be supported. However, the neighboring jurisdiction can set policy in response. This establishes the potential for a classical prisoner's dilemma consideration: in this case to tax (cooperate) or to toll (defect). Even if both jurisdictions would together raise as much revenue from taxes as from tolls (and perhaps more since taxes may have lower collection costs), the equilibrium solution in game theory, under a one-shot game, is for both parties to toll. However in the case of a repeated game, cooperation (taxes and possibly revenue sharing) which has lower collection costs is stable.