Traffic, transportation, infrastructure and externalities - A theoretical framework for a CGE analysis

In Europe traffic congestions make it impossible to estimate travel time. The increasing number of cats calls for a transportation policy towards an improved efficiency of the transportation system. However, extending road infrastructure to reduce the congestion externality implies another type of externality, air pollution. Designing a transportation policy in industrialized countries one has to consider this trade-off. Our objective is to investigate the role of transportation services and their prices within an interindustry framework. The authority wishes to minimize total cost of production with respect to the provision of infrastructure subject to an emission standard. By omitting a financial constraint to finance infrastructure we determine the size of infrastructure where no congestion occurs. The productivity effect of infrastructure and the cost savings from a dissolved congestion determine the optimal stock of infrastructure. Our congestion index is unity in that case of no financial constraint. If the extension of infrastructure has to be paid for by taxation, we obtain a lower level of infrastructure. In view of the trade-off between the benefit of a productivity gain from a dissolved congestion and the deadweight loss from taxation this lower level of infrastructure will result in an index of congestion higher than unity, implying a negative externality to the economy.