Joint provision of transportation infrastructure

This paper considers the following scheme for the joint provision of transportation infrastructure: two regions jointly establish an operator for the infrastructure who is then responsible for collecting the user charges. The two regions make financial contributions to cover the costs of the infrastructure investment, and the revenue from user charges is distributed according to the share of contribution. The governments of the two regions choose the contribution that maximizes their regional welfare. Assuming that the infrastructure use is non-rival, we show that financing the infrastructure with revenue from user charges is better than financing it with tax revenue. We extend the analysis by incorporating congestion in infrastructure use. We show that independent decisions on contributions by two governments attain the first-best optimum when the operator sets the user charge such that the toll revenue just covers the cost of the investment. We further examine the conditions under which two governments participate in joint provision at Nash equilibrium.