Infrastructure access pricing and lumpy investments

Turvey, R (2002) Infrastructure access pricing and lumpy investments. Working Paper. London Business School Regulation Initiative Working Paper Series.

Abstract

In some industries infrastructure capacity cannot be increased continuously because of indivisibilities. Output growth results in increasing congestion until additional capacity is installed. Pricingrelevant marginal costs therefore rise until capacity is increased and then fall. Thus the problem arises of reconciling marginal cost pricing with the remuneration of investment in new capacity. The nature of congestion costs in airports, railways and electricity transmission and the lumpiness of infrastructure additions are descibed. The problem of paying for investment is then analysed, first using some simple static models and then addressing important complications ignored in them. Some possible solutions to the problem are proposed.