Within a highway transportation network, the social welfare implications of two different groups of agents setting tolls in competition for revenues are studied. The first group comprises private sector toll road operators aiming to maximise revenues. The second group comprises local governments or jurisdictions who may engage in tax exporting. Extending insights from the public economics literature, jurisdictions tax export because when setting tolls to maximise welfare for their electorate, they simultaneously benefit from revenues from extra-jurisdictional users. Hence the tolls levied by both groups will be higher than those intended solely to internalise congestion, which then results in welfare losses. Therefore the overarching question investigated is the extent of welfare losses stemming from such competition for toll revenues.
While these groups of agents are separately studied, the interactions between agents in each group in competition can be modelled within the common framework of Equilibrium Problems with Equilibrium Constraints. Several solution algorithms, adapting methodologies from microeconomics as well as evolutionary computation, are proposed to identify Nash Equilibrium toll levels. These are demonstrated on realistic transportation networks. As an alternative paradigm to competition, the possibilities for co-operation between agents in each group are also explored.
In the case of toll road operators, the welfare consequences of competition could be positive or adverse depending on the interrelationships between the toll roads in competition. The results therefore generalise those previously obtained to a more realistic setting investigated here.
In the case of competition between jurisdictions, it is shown that the fiscal externality of tax exporting resulting from their toll setting decisions can substantially reduce the welfare gains from internalising congestion. The ability of regulation, co-operation and bilateral bargaining to reduce the welfare losses are assessed. The research thus contributes to informing debates regarding the appropriate level of institutional governance for toll pricing policies
