Transport Infrastructure Investment and Demand Uncertainty

In transportation planning, there can be long lead times to adapt capacity. This article addresses two questions. First, in a one mode world (e.g., rail or road), what is the optimal capacity choice when faced with uncertain demand, long lead times, and congestion. Using a simple analytical model, it is shown that when demand is inelastic, it is socially optimal to invest more than if only the expected level of demand is taken into account. In this case, it may be beneficial to overinvest in capacity because congestion costs are an increasing function of relative use. This result holds with or without optimal tolling. The second question deals with 2 competing modes in which only one mode has long lead times for capacity, whereas the other has flexible capacity. This is typical for the competition between high-speed rail and air for the medium distance trips (500-1,000 km), or for the competition between inland waterways and trucks for freight. We find that overinvestment is less justified because the substitute mode can more easily absorb the high-demand outcomes.