This paper looks at the differences between the private firm and the public planner in timing investment in projects involving large sunk costs in growing markets. It shows that competition in the private sector will drive firms to invest earlier than the socially preferred date whilst a low ratio of private (producer) to public (producer plus consumer) benefits will cause them to delay relative to the socially preferred date. The paper looks at policy instruments for altering the private sector’s timing decision.
Topic: 5.6 General
The paper examines arguments which suggest that the investment plans of the UK’s nationalised industries before the end of the 1970s were inadequately constrained by the control mechanisms then in place but the newly privatised utilities subject to price cap regulation have inadequate incentives to invest. Comparison of the likely social costs of underinvestment and overinvestment suggest that the former will generally be higher under existing regulatory mechanisms. The paper concludes by suggesting solutions to the dilemma posed.
The projected deepening and widening of the Suez Canal would be economically beneficial both to Egypt and to the users (including the oil-producing countries, the oil companies, the shipping industry and the consuming countries). The authors reach this conclusion after reviewing the estimated cost in relation to the quantities of Middle East oil going to northwestern and to southern Europe, comparative costs of transporting it by the Cape route and by existing and projected pipelines, and revenue under possible new toll systems.
The author differs from the conclusions of Dafermos and Sparrow in this Journal in May 1971. He develops a model and decides that under simple conditions a myopic investment rule is adequate for a road or a network if congestion tolls are applied.
Where travellers are free to choose their own routes, the only way to ensure maximum benefit from investments is to levy congestion tolls based on the path taken from origin to destination, rather than on use of a particular link.
The author explains and compares various methods for solving the problem set out in her first sentence: “given a list of possible development projects, to select that combination which provides the best traffic network, evaluated in terms of given criteria”.