Self-Financing Roads

In 1962, Mohring and Harwitz derived conditions under which an optimally designed and priced road would be self-financing. This paper briefly summarizes subsequent research on the relationship between congestion-toll revenues and road costs. Despite its transparency, the self-financing theorem can lead to erroneous interpretations. A simple numerical model is used to investigate three possible misinterpretations. The welfare losses are found to be substantial if capital and investment cost are confused or if a balanced-budget constraint is imposed under second-best network conditions. In contrast, losses from imposing a balanced-budget constraint when economies or diseconomies of scale exist are surprisingly small.