On the Design of Public Infrastructure Systems with Elastic Demand

This paper considers the optimization of public infrastructure systems, recognizing that these systems serve multiple user classes. Under the guidance of a policy-making body, the analyst chooses both the system design, including its layout and control, and the prices to be charged for the service. The goal of the optimization is to maximize society's welfare recognizing that the system's performance will in general depend on the system's demand, and vice versa. The optimization problem is first formulated in its full complexity. Under defined circumstances, the problem decomposes into three sub-problems that can be solved sequentially. The resulting design is independent of how net user benefits are measured. If the policy-making body does not specify cost or demand targets, and instead assesses benefits by means of consumer surplus then the optimum design is still the solution of a conventional design problem with fixed demand. In this case, however, the demand has to be obtained iteratively using a marginal cost pricing rule.