Abstract
Price regulation to limit monopoly charging by a commercial road supplier prevents full transfer from users to the supplier of marginal benefits from investing and maintaining to improve service quality. Marginal revenue from quality improvements falls short of marginal social benefit leading to underprovision. A form of incentive regulation is proposed that ensures full benefit transfer. Out of revenues raised from users, the regulator pays the supplier a shadow toll that varies with the level of service quality as measured by users’ average generalized costs. Under the assumptions of the model, profit-maximizing and economically efficient investment and maintenance outcomes align.
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