Revenue Choice on a Serial Network

Abstract

A model to examine the choice by jurisdiction whether to finance roads with taxes or tolls is developed. The idea of decentralized, local control and multiple jurisdictions distinguishes this analysis from one where a central authority maximizes global welfare. Key factors posited to explain the choice include the length of trips using the roads, the size of the governing jurisdiction, the elasticity of demand to revenue instruments, and the transaction costs of collection - which dictate the size and scope of the free rider problem associated with financing. Spatial complexity in this problem results from the fact that jurisdiction residents use both local and non-local networks, and each jurisdiction's network is used by both local and non-local residents. The central thesis argues that, since jurisdictions try to do well by their residents who are both voters and travelers, the effects of a revenue instrument on local residents is a key consideration in the choice of that revenue instrument. Decentralization of control and lower toll collection costs are identified as conditions under which tolls would more likely become the preferred revenue instrument for highways.