Transport Infrastructure, Spatial General Equilibrium and Welfare

Abstract

Large-scale investments in transport infrastructure have been traditionally evaluated assuming the equivalence between direct and indirect economic effects (Jara-Diaz,1986), which is only correct under -generally non-guaranteed- perfect competition assumptions. Despite this common practice there is still no consensus amongst economists as to how the benefits and costs of large infrastructure projects should be determined. The discussions regarding the desirability, for instance, of the Betuwe railway line, the fifth runway at Schiphol Airport, the North-South underground railway in Amsterdam etc. are illustrative of this. The focus has been, in particular, on the magnitude of ‘indirect’ and ‘strategic’ effects, that is effects on parties other than the direct users of the infrastructure (indirect effects) and those factors that have a favorable effect on the long-term development of the (regional) economy, such as effects relating to firm location and demographics (strategic effects). Focusing on general equilibrium, increasing returns and imperfect competition modeling approach this paper aims to throw light on this subject matter by examining how the social benefits in terms of efficiency resulting from improvements to the infrastructure can be determined in an imperfect regional economy.