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GLOBAL-LOCAL INTERPLAY IN THE BALTIC SEA REGION Pärnu, Estonia, October 1-4, 1998  Imdad Hussain, Niklas Nordman, Lars Westin
Abstract
This paper considers the benefits from a transport improvement when economies of scale are present. Our analysis is based on a spatial general equilibrium model using a network of three regions. The model assumes the existence of interregional transportation of goods. In each and every region, the production of goods is characterised by two primary factors and three intermediate inputs. Also, it is assumed that an improvement of a transport link between two regions reduces the cost of transportation on that particular link. The benefits of the improvement are measured in two different ways. First, the change in consumer surplus using the general equilibrium demand for transportation on the improved link is approximated. This measure of the benefits is then compared with the economy-wide benefit measure calculated through aggregating equivalent variation of consumers in the three regions.
It is found that under increasing returns to scale in production the traffic-oriented benefit measure underestimates the total benefits of the transport improvement. Moreover, such a gap between the two measures varies directly with the size of the scale parameter. However, the gap tends, ceteris paribus, to be lower in more flexible economies. Those aspects of transport infrastructure appraisal are highly relevant and must be given due consideration in investment decision making.
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