WELFARE AND PROFIT DIVERGENCE FOR A TOLLED LINK IN A ROAD NETWORK.

In recent years, a very old idea has been given new life: private companies, it is argued, should be allowed to build and operate roads at their own expense, and in return should receive the revenue from road tolls. In the arguments of the pri vatisers, there is often a tacit claim that if a road is profitable, then its construction also gives a positive welfare increment, compared with the do-nothing alternative. And in claims for widespread, if not universal, efficacy of such privatisation, the converse claim may also be implicit ? that (almost) any road which adds to welfare will be profitable, and hence can be provided privately. However, a moment's thought about each of these two propositions reveals that, in practice, this is not necessarily the case. The first proposition can fail whenever a government subsidises construction, through a gift to the company of the right-of-way or in some other manner; it is also challenged whenever road use brings unpriced negative externalities. The second proposition can fail if the company is unable to implement the price discrimination that may be needed to facilitate extraction of a major proportion of the user surpluses. Besides such direct causes of divergence, the signs of the profitability and welfare increments can differ because of interdependence between links in the road network. It is this kind of interdependence which is examined in this paper. The financial consequences of networkinterdependence cloud the appraisal of schemes for private ownership of tolled links within road networks (as indeed for rail, pipeline and electric-power networks). In particular, the modelling presented in the paper shows how, and under what circum stances, a link that is profitable (even without government subsidy) can nevertheless bring a negative welfare increment. Network interdependence can take several forms. Serial interdependence occurs when a journey requires travel over a sequence of road links, including the tolled link whose provision is under consideration. The journey may involve travel over another toll road, as for example in the case of the Leesburg extension of the Dulles toll road in Virginia (Gomez-Ibanezeffl/., 1991).