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A2 Economics- Transport Economics
Chapter 5: Transport, transport trends and the economy
Transport
Transport: the movement of people and goods for personal and business reasons
...

Mode of transport: means of transport, basically road, rail, air and sea transport
...


The demand for transport
Derived demand: demand that depends upon the final output that is produced
...
g
...

Determinants of demand:
1
...

2
...

3
...

4
...

5
...

 Convenience
...

 Connectivity
...
Higher economic activity
...

Economic benefits of transport:
1
...

2
...

3
...

 Reduces inflationary pressures
...
Improves quality of life:
 Increases consumer choice (Exotic fruit)
...


Advantages and disadvantages of the main modes of transport
Passenger transport
Type
Private
car

Advantages
Most flexible and
convenient mode

Bus

Generates less
congestion than cars
Generates positive
externalities
High-speed

Rail
Air

Purpose
Door-to-door service
...


Freight transport
Type
Road

Advantages
Flexible, convenient
and connectable
...


Disadvantages
Problems with
congestion
...

Time-sensitive and
expensive cargo
...


Limited and fixed
routes
Limited and fixed
routes
Slow

Elasticity in transport
Importance of elasticity:
-Accurate elasticity data helps a firm estimate the likely impact of e
...
a price rise n
demand for products and their substitutes
...

Income elasticity To predict the impact of economic growth (causing income to go
of demand
up) on superior and normal goods
...

Cross elasticity of To see the impact of pricing decisions by competitors on products
demand
and decide whether to increase/decrease the price
...

-Road and public transport are weak substitutes for commuters (low, positive cross
elasticity value)
...

Extensive privatisation since the 1994/1995 means that transport organisation in the
UK now mainly is in the private sector
...

Private sector ownership:
-Passengers:
 Local and long-distance bus and coach services
...

-Freight:
 Road freight and distribution
...

-Passengers and freight:
 Domestic air services
...


Recent trends in transport demand
2 measures transport demand is measured:
1
...

2
...

Trends from 1980 to 2008:
General trend:
-Total road traffic has increased by 85% (most of it between 1980 and 1990)
...

Trend by mode:
-Total demand for domestic travel increased by 65%
...

-Rail transport demand increased by nearly 60% (only been since privatisation)
...

Trend in goods transported:
-Overall trend was upwards for most of the period (a few falls in demand in line with
state of economy)
...

-Road freight now accounts for 65% of all goods moved, compared with 53% in
1980
...

Key points on current UK transport trends:
-Sustained economic growth means higher car ownership and more goods and
workers are being transported
...

-The duration of peak time periods is increasing
...


General comparisons with the rest of the EU
-Car ownership levels highest in Germany:
 Has by far the largest volume of road traffic
...

-France has had the greatest growth in distance travelled by goods vehicles:
 By far the largest volume of goods traffic
...

-Rail freight demand increased most in the UK
...

How do they forecast?
Statistics used for forecasting:
1
...

-Higher levels of economic output will increase demand for transport services:
 More goods need to be transported around the country
...

2
...

3
...
g
...

4
...

5
...
g
...

6
...

Why do they forecast?
-Used to determine future network requirements and find where the greatest
congestion bottlenecks will be in the future
...

-Helps government to see how effective transport policies will be in the future:
 To see which policies should be introduced
...
Estimates:
-The forecasts are only estimates:
 Unreliable and may be wrong
...

2
...

3
...

4
...

-To gain accurate and reliable forecast may be very expensive
...

Fixed costs: costs that are independent of output produced
...

Variable costs: costs that are directly related to the level of output produced
...

Total cost: the total expenses incurred to a firm
...

Average cost: the unit cost of production
...

A fall in marginal cost reduces average cost and a rise in marginal cost increases
average cost
...

As output increases AVC will initially fall and then rise (U-shape)
AVC will eventually outweigh the effect of the falling AFC, causing ATC to
rise
...


Revenue:
Revenue: payment a firm receives from sales
...


Total revenue = Quantity ´ Price

There are price takers and price makers
...

Price maker: a firm that has control over the market price
...

Marginal revenue:the change in total revenue from selling one additional unit of
output
...

TR = 0 gradient, MR = 0, demand = unit elastic
...

TR is maximised when PED=1
...

Long run: time period when all factor inputs can be changed
...

-Firms can operate at different levels of capacity in the long run
...

Diseconomies of scale: disadvantages, in the form of higher average costs from
increasing scale of production in the long run
...

Reasons for economies of scale:
1) Technical economies:
Technical economies: reduced long run average costs due to increased capacity or a
technological development
...

2) Financial economies:
Financial economies: savings in long run average costs that firms may receive when
borrowing money
...

3) Purchasing economies:
Purchasing economies: reduced long run average costs due to bulk buying of inputs
into a business
...

4) Managerial economies:
Managerial economies: savings in long run average costs due to specialisation of
management
...

Reasons of Diseconomies of scale
1) Problems of communication:
 In larger firms large costs may be incurred in making managers aware of what
is going on
...

3) Problems of industrial relations:
 In large firms, workers may feel more alienated and relationships with the
employed may become more strained
...


Firm‟s objectives
1
...

-Fundamental assumption that a firm will seek to make the highest level of profit
possible (MC=MR)
...

-Large profits may attract attention of government, damage employee relations and
attract new entrants
...

2
...

-Firm‟s managers may be unwilling to take unnecessary risks that are likely to occur
with profit maximising
...

-If a firm has close rivals, and fears of consumers switching to competitors
...
Sales revenue maximisation:
Sales revenue maximisation: an objective where a firm produces where marginal
revenue is 0
...

Predatory pricing: setting price low with the aim of forcing rivals out of the market
...


4
...

-Increasing output up to the break-even level (TR=TC)
...

Cross-subsidisation:a business practice where revenue from profitable activities is
used to support loss-making ones
...

Normal profit: the level of profit needed to keep a firm in the market in the long-run
(seen as a cost of production)
...

Supernormal profit: any extra profit made in excess of normal profit
...


Market structure
Market structure:the characteristic of a market
...

 Size of firms
...

 Nature of the product
...


Barriers to entry and exit
Barriers to entry:obstacles to new firms entering the market
...

1
...

 If the costs necessary to start a business are high it will deter firms entering the
market
...
Economies of scale:
 Firms already in the market will experience higher economies of scale due to a
lower LRAC curve and higher output
...
Legal barriers:
 Entry to the market is regulated, making it difficult for new firms to get
operating licenses etc
...
Brand loyalty:
 It is difficult for a new firm to enter the market if there is high brand loyalty to
the firms in the market
...
Predatory pricing:
 When a firm deliberately charges low prices it is difficult for new firms to
compete, preventing them from entering the market
...
Access to natural resources:
 Difficult for new firms to enter if incumbent firms are the ones that have
access to natural resources
...

Productive efficiency:using the least amount of scarce resources to produce the
maximum output
...

Allocative efficiency: where consumer welfare is maximized
...

X efficiency: when a firm uses less inputs than are necessary for a given level of
output (lowering short run average cost)
...

Dynamic efficiency: improvements in products and processes by exploiting
economies of scale or investing in R&D to lower LRAC
...


MARKET STRUCTURES:
1
...

Characteristics:
1) Many small firms:
-High level competition and choice:
 Lots of perfect substitutes
...

3) Homogenous product:
-Identical products:
 Price is the only determinant of how much gets sold (no product
differentiation)
...

-Consumers chose the price (price mechanism)
...

-If market demand increases, the incumbent firms will earn supernormal profit
...


-As shown above, this can mean super normal loss is made, so firms may then exit the
market
...

Long-run:

Characteristics:
1) Profit:
-The firm is making a normal profit (AC=AR)
...


-Productively efficient (MC=AC):
 High incentive to be productively efficient due to high competition
...
Monopoly:
Monopoly: a single firm in a market
...

Characteristics:
1) One firm:
-No competition and choice:
 No close substitutes
...

2) Imperfect information/knowledge:
-Firms don‟t know the price, cost and revenue of other firms, they don‟t know how to
be most competitive
...

4) High costs to entry and exit:
-In the short-run and long-run the diagram is identical because people will not easily
enter and exit the market (D=AR=P will not move)
...

Price maker: a firm that influences price when it changes its output
...

-The price is high, the output is lower, lower consumer surplus
...

Price discrimination:
Price discrimination: where a monopolist charges different prices for the same
product in different markets
...
g
...
g
...

-Some degree of monopoly power:
 They need to be price makers, to charge different prices
...

Disadvantages of a monopoly:
-Higher prices and lower output:
 This leads a decline in consumer surplus and a deadweight welfare loss
...

-Productive inefficiency:
 It is not producing using the least amount of scarce resources (MC is not equal
to AR) and it is not at the lower point of the AC curve
...

-Supernormal profit:
 High profits may lead to an unequal distribution of income
...

Benefits:
1) Firm:
-Economies of scale:
 Low average cost
...

-Potentially supernormal profits in the short and long run:
 Can invest more in capitol and lower cost
...

2) Consumer:
-Lower average cost means:
 Firms can afford to lower prices (price discrimination) to benefit economically
weaker sections of society
...

-If prices are too high, the government can intervene using regulation
...

-Can afford to lower prices (price discrimination) to benefit economically weaker
sections of society (low average costs)
...

 However, low incentive
...

2) Do they enjoy economies of scale?
-Depends on where the monopoly is currently at (may or may not experiences
economies of scale and may or may not experience lower average cost)
...

4) Natural Monopoly?
 Usually a service, so is it better if it is a monopolist market?

Natural monopoly
Natural monopoly: a market where long-run average costs are lowest when output is
produced by one firm
...

 They deter entry and exit
...

-One firm can supply the entire market at a lower cost than 2 or more firms:
 Firms entering may cause a potential loss of efficiency (wasteful duplication
of scarce resources)
...


ASK DOWNS WHY IT IS NOT PROFIT-MAXIMISING
-The average cost curve is downwards sloping and not U-shaped as it is only
experiencing economies of scale
...


Contestability is the threat of competition
...

-Low cost barriers to entry and exit:
 Same access to technology
...

 Absence of sunk costs
...

Firms‟ behavior with contestability:
-Firms that produce supernormal profits, attract new firms to enter the market,
especially if there are low barriers to entry/exit
...

-These firms would then again leave the market when profit levels fall back to
normal
...

-This is called „hit-and-run’ entry
...

Graph of a contestable market:

-A profit-maximising monopoly will operate at P1,Q1, and be making supernormal
profits
...

Benefits:
1
...


2
...

3
...

4
...

Drawbacks:
1
...

 Lower quality products
...
Potential lower economies of scale:
-Due to high competition, firms experience lower economies of scale (lower natural
monopoly power):
 Higher average costs causes price to increase (less allocatively efficient)
...
“Hit and run”:
-Due to low barriers to entry firms can enter and leave the market causing fluctuations
in the market
...
Duplication of resources:
-Due to low barriers to entry more firms will enter the market:
 Producing similar products/services is a misallocation of scarce resources
...
Lower barriers to entry:
-Lower legal barriers such as licensing will mean that it is easier for new firms to
enter the market (more contestable)
...

2
...

With the move towards leasing of planes, firms will find it easier to enter the market
as they will not incur losses from selling assets on leaving the market
...

3
...

-If this occurs then potential entrants will be able to enter the market much more
freely because they will be able to compete freely against exisiting suppliers who will
no longer be able to undercut them using their market power and economies of scale
to do this
...
Oligopoly:
Most realistic model of market structure
...


Characteristics:
1) Small number of large firms:
 High concentration ratio
...

2) Price makers
...

-Price competition:
 War
...

Collusion: where firms taxitly or otherwise agree to not compete on prices, service
provision and other matters that might adversely affect mutual well-being
...

4) Sticky prices (price stability):
-Risks and uncertainties associated with price competition
...

 Exclusive contracts, patents and licenses
...

 High set-up costs (sunk costs)
...

6) May not profit-maximise
...

Sticky price:
-If the firm increases its price from P to P1 in a non-collusive oligopoly, other firms
do not follow the price
...

-If the firm decreases the price from P to P2 in a non-collusive oligopoly, other firms
will follow
...

-This means both ways the firm will lose revenue, whether it decreases or increases its
price
...

Why are there sticky prices?
-Firms wont change their price because they may loose out on revenue (uncertainty)
...

Game theory:
Game theory: a means of modeling the behavior of firms
...


4
...

Aim to product differentiate
...

Small scale advertising, after-sales service, better location outlets and improved
quality of products
...
Price makers:
 Due to slight product differentiation
...
Large number of firms with relatively low market size
...
Low barriers to entry/exit:
-Easy for firms to enter/exit the market
...

-Supernormal profits are competed away, causing the demand curve for each one
firm to shift to the left, as shown below
...

-New entrants take sales away from existing firms when they enter the market,
which is why the demand curve for existing firms shifts to the left
...

Disadvantages compared to competitive market:
-Allocative inefficient:
 P≠MC in long- and short-run
...

Deadweight loss: loss of society of the firm producing where price exceeds
marginal cost
...

 There is excess capacity, which could be addressed with fewer firms
...


Summary of all market structures
Characteristic
No
...

What does it do?
Reducing barriers to entry increases competition as it is easier for firms to enter the
market
...
Reduced barriers to entry:
-This increases competition as it makes it easier for firms to enter the market
...

2
...

-Lower price means higher consumer surplus and therefore higher allocative
efficiency
...
Increased efficiency:
-Due to higher competition there is a higher incentive to be more productively
efficient; to reduce average costs (x-efficiency) to lower prices
...

Costs of deregulation:
-Duplication of resources:
 Wasting scarce resources (less allocatively efficient)
...


-Negative externalities with more firms providing services:
 Negative impact on 3rd parties
...

-Monopolies often form:
 Higher prices (allocatively inefficient)
...

-Loss of supernormal profit:
 Less incentive to spend on R&D (loss of dynamically inefficiency)
...

-Domestic and EU air passenger transport (1997)
...

-Two main reasons for the deregulation:
 The market for local bus services has been declining annually since the mid1950s, and in order to maintain services, local authorities were obliged to
provide ever-increasing subsidies
...

-Many of the hoped-for benefits from deregulation have failed to materialise:
 In a report, the Committee commented on the poor quality and unreliability of
services
...

 Level of competition varies e
...
in Bristol First Group operates 95% of all bus
services in and around the city
...

-Since 2004 this market has included carriers in the new member states of central and
Eastern Europe
...

 Airlines are permitted to fix their own fares, subject to predatory pricing
safeguards
...

-Positive effects of deregulation:
 Massive growth in passenger numbers, particular for low-cost airlines (in
Ryanair there has been a 6-9% increase per year since deregulation)
...

 New routes, particularly from smaller regional airports
...


-Although deregulation has made the market more contestable (benefit to consumers),
it has also lead to environmental damage
...

Key points:
-Aim to increase competition
...

-A reduction in journey times
...

-Fares to be set in line with current policy
...

-It was feared that in a fully competitive market there would be excessive supply and
congestion
...

Problems:
-Significant technical flaws in the bidding process
-Revenue support causes less of an incentive to increase revenue (less efficient)
...

 Share issue
...

 Franchising
...
Revenue for the government:
-Generates windfall revenue when they sell it to the company
...

 Addition to revenue can be spent on other goods (merit goods)
...
High incentive to increase profits (be competitive):
-Higher incentive to invest in R&D:
 Higher incentive to invest in R&D and be more dynamically efficient
...

 Bigger service and products allows you to enjoy economies of scale (increase
productivity with relatively less change in average cost)
...

 Allows private sector firm to lower the price and increase their consumer
surplus (higher allocative efficiency)
...
Natural monopolies:
-Improving production techniques lowers your average cost (economies of scale):
 They can therefore charge a lower price
...

Problems of privatisation:
1
...

2
...

3
...

4
...

5
...

Depends on:
1
...

2
...

-Incentive for cross-subsidisation if it price discriminates:
 Using the profits from high-profit goods to finance low-profit goods (still
provided even if it is private sector)
...

Privatization of rail industry:
-In 1946 the UK rail industry was nationalized and operated by a public corporation
called British Rail
-In 1996 Rail Industry was privatized and split into four sections:
1
...
Passenger Operations (TOCs)
3
...
Rolling Stock Companies (own trains)
-Train Operating Companies are firms with a time limited franchise (usually 8 years)
awarded by the Department of Transport to operate passenger train services (done by
bidding)
...
Buses:

Impact of deregulating local buses:
-Initially deregulation made markets more competitive and contestable
...

-Concentration ratios have increased due to economies of scale and brand loyalty:
 In 2010 UK major bus operators are Arriva, First Group, Go-Ahead, National
Express and Stagecoach
...

2
...

-Short franchises are a disincentive to long-term investment in infrastructure
...
g
...

How was it successful?
-Subsidies received reduced
...

-Fewer accidents per billion passenger kilometres (safer)
...

-Higher overcrowding
...

-The CO2 emissions due to transport have increase by nearly 40% from 1990
...
Pollution:
-The use of transport burns fossil fuels, which releases toxic gases into the
atmosphere
...

 Global Warming from rising CO2
...
Noise:
-The use of cars is a disturbance (external cost) to other people (third parties):
 When it reaches certain intensity it is unwanted
...

-The use of planes is even worse as it is not always continuous:
 The noise problem of Heathrow is a major obstacle to build a 3rd runway
...
Accidents:
-Although traffic has increased the fatality rate for all types of transport in the UK
have gone down
...

 Material costs through damage to vehicles
...
Congestion:
-This is when the volume of traffic is greater than the operating capacity of the road:
 Demand exceeds supply
...

 The cost of making a journey is greater
...

-Lower efficiency of the logistics function
...
Blight:
-Through providing transport facilities, the quality of urban landscape is
compromised
...

-A negative externality is when only private costs are accounted for when making a
decision and not the affects on a third party i
...
those not involved in the decisionmaking process
...
g
...
g
...


-As shown in the diagram, the free market has cleared where MPC=MSB i
...
it has
ignored the external cost of the action, and not at the social optimum where
MSB=MSC
...

-Therefore, under free market conditions, the value Q (the usage of the car) is higher
than the social optimum i
...
too many scarce resources are used
...
The value of time that is lost when roads uses are stuck in traffic
...
The additional fuel costs and maintenance costs running vehicles in congested
conditions
...
The additional vehicles required by commercial users as their fleets are not being
used efficiently
...
The cost of the economy of lost inward investment from firms that would otherwise
have invested in the UK
...

 Instead a shadow price has to be imputed
...

The cost of accidents:
1
...

 Average costs calculated depending on the age and current earnings of the
person involved
...

2
...


Policies to correct negative externalities
1
...


2
...


-Argument for:
 Positive externalities (trains provide external benefit to the community so
subsidising them and reducing prices and congestion has a high social benefit
...


Cost-Benefit Analysis
Cost-benefit analysis: a technique for assessing the viability of a project, taking into
account all the effects over time
...

Necessary to use cost-benefit analysis for new road schemes:
-Roads are quasi-public goods for which no direct charge is made:
 Market mechanism cannot be used to allocate resources
...

Aim:
-To gain a single monetary value (shadow price) for the Net Social Benefit (NSB) of
a project:
 Scarce resources will be allocated to the project with the highest NSB (in
order to maximise social welfare)
...

4 Stages:
1
...

 Include tangible/intangible costs/benefits
...
Place a monetary value on each cost and benefit:
 Using normal market prices or shadow prices to value externalities
...
Take account of the timing of costs and benefits:
 Costs and benefits of a project last many years (difficult to measure)
...
Take account future risk and uncertainty:
 Best and worst case scenarios
...
Establishing the net present value:
 This involves adding up the benefits and deducting costs
...

Benefits:
-A clear/easy to use:
 NPV (Net Present Value) and BCR (Benefit Cost Ratio) present the results of
CBA in monetary value (a number)
...

Challenges:
-Identify:
 Which costs and benefits are best included or left out
...

-Predict:
 How accurate is input data?
-Projects usually create „winners and losers‟
 Society may gain but what is costs fall mainly on the disadvantaged while the
benefits are enjoyed by the privileged (inequity)
...

-When NPV is positive it is done, when BCR has a ratio of more than 1 the project
should go ahead usually except when e
...
the area is a natural habitat
...

Total benefit split into 3 main components:
-Time savings
...


-Vehicle operating cost savings:
 Direct cost to road users of fuel cost savings
...

Two main cost components:
-Capital costs:
 Early phase of any major road project
...

-Maintenance costs:
 Annual costs to cover the cpsts of lighting, cleaning and routine resurfacing
work
...

Disadvantages:
-Difficult to understand COBA model:
 Limits ability of the public to participate fully when there are public inquiries
into new road schemes
...

-Environmental effects not adequately addressed:
 Problem of putting a monetary value on environmental costs
...

-Only applies to roads:
 A method needed that applies to all forms of transport
...
g
...


Obtaining monetary values to the external costs
Methods:
1
...

2
...

-Monetary valuation of the police time used at the scene of the accident
...

3
...

4
...

-Environmental benefits of e
...
greater bus/train use
...
Simple price comparisons:
-Used to see the decline in value as an external cost
...
Attaching values to uncertainties:

-If someone dies it is difficult to measure the cost e
...
how much they would have
earned for the rest of their lives
...


Sustainable transport
-Policy aimed to switch from environmentally damaging to more environmentally
acceptable modes of transport:
 Switching passenger and freight transport away from road-based modes
...

Sustainability Issues with Transport:
-It often uses non-resources:
 E
...
Petrol
...

-Externalities:
 Pollution
...

 Congestion
...

 Stress
...

Current problems:
-Economic growth trend (rise in income and population):
 Massive growth in China, Russia etc
...

-Only carries a few people
...

-Uses non-renewable resources
...

-Not dependant on fossil fuels
...

Train
-Lower emissions due to mass transit
...

-Uses non-renewable resources
...

-Higher CO2 emissions
...

Trucks/Lorry -Highest amount of CO2
...


Ships

-Takes low amount of freight compared to ships
...

-Reduce congestion
...

 Less market failure arising from negative externalities
...

-Freight by rail/larger vehicles:
 Reduce emissions per output
...

 More efficient allocation of scarce resources
...

 Too many scarce resources used, so over-consumption of cars (negative
externality)
...


Road Pricing
Aims:
-Increase the private cost of cars (discourage driving):
 Incentivising people to use buses and trains (mass transport)
...

 Urban congestion
...

 Stress
...

-Potential hypothecation:
Hypothecation: a situation where revenue from a tax is directly allocated to some
other purpose
...

 Lower fares and higher quality of services encourage shift from car to
buses and trains
...

Road user charging: a form of road pricing where a flat-rate charge is made for
the use of stretch of road or access into a designated charging zone
...


At Joffpeak MSC=MSB=MPB
...

Less than JCapacity is where off-peak is and more than that is where peak is
...

MSC = MPC + MEC
...

 If too high they may have too much of an impact on supply/demand
...

-Burden of taxation falls more heavily on low income drivers:
 Regressive taxation (Individual & small businesses)
...

-Is charging a once „free good‟ fair?
-High set-up costs, so there is a significant opportunity ccost to the government of
introducing such schemes
...

-PES:
 If inelastic, road pricing will have a very small impact on their supply unless
set at a very high level
...

 Without this people will not switch to other modes of transport
...

-Stated aim: to encourage people to use greener modes of transport
...

-2004: traffic cut by 18%, delays decreased by 30%
...

-Trains/tubes had a 10% increase in passengers
...

-75% of Londoners now support the scheme
...
m-6p
...

But:
-May have a decrease in road congestion but now made public transport system
„unbearable‟
...
)
-Businesses and shops complain of decrease in sales
...

 Cross rail/HS2 coming  at a decrease in motorway congestion
...

Singapore: Electronic Road Pricing
-Their highway system always moves above 30mph despite it being very densely
populated
...
g
...
m expensive and noon=cheap
...

Effects:
-50% of people to take public transport to work
...

-Less tax revenue spent on paying for new roads to ease congestion
...

Stockholm:
-Congestion charge area including whole of Stockholm City Centre
...

 6:30 a
...
– 18:30 pm
...
42
...

Effect:
-20% reduction in traffic use, which brought traffic back down to below free-flow
point:
 Massive decrease in congestion
...

 When reintroduced in 2007 traffic increased and there was a lot more
congestion
...

-No significant increase in congestion on non-charged routes
...


Possible Alternatives to Road Pricing
1
...

-Athens tried it but car ownership actually went up:
 Drivers bought 2nd-hand cars with different plates so they could drive
everyday
...

Disadvantages:
-Very inconvenient to people in a rush/emergency
...
:
 Negative economic impact
...
Raising the driving age:
Advantages:
-Simple with lo large set-up costs
...

Disadvantages:
-Is it fair?
-Economic impacts:
 Young people in rural areas can‟t get to jobs causing a decrease in the
mobility of labour
...
Increase in fuel price:
Advantages:
-Polluter pays
...

-Generates revenue
...

Disadvantages:
-Regressive tax (high effect on passengers and small businesses)
...

-Have no viable substitute so it is unfair
...
Traffic management:
-Dedicated lanes for high-occupancy vehicles will decrease journey time
...
g
...

Disadvantages:
-Expensive
...

5
...

-Investment in bus/rail to increase XED (make a close substitutes for cars)
...
g
...


Positive externalities of transport
1
...

-Increases skills
...
g
...
Increase investment in transport leads to economies of scale:
e
...
Crossrail 200m trains that hold 1500 passengers and increase capacity by 10%
...
Mobility of labour:
-Better access for workers
...

-More government revenue
...
g
...
5 million people to within 45 minutes of central
London
...
Increased productivity:
-Reduced travel times
...
Economic growth in certain area:
-Multiplier effect
...
Short-term congestion:
-Shut down streets during construction
...
g
...

2
...

e
...
production of cross rail
...
Noise:
-Loud production causes stress
...
Environmental damage:
e
...
HS2 kills a lot of slugs and butterflies
...
Increase in accidents:
-Potentially dangerous working environment
...
g
...

6
...

e
...
HS2 (in the middle of countryside)
...
Pressure on surrounding infrastructure
...
g
...


Chapter 8: Transport economics and government policy
Sustainable Transport Policy
-A policy that promotes:
 Meeting the needs without compromising the ability of future generations to
meet their own needs(Brundtland report 1987)
...
g
...
g
...

 Congestion charge that is hypothecated into improving buses means people
will switch to a more sustainable mode
...

-Reduction in negative externalities:
 Polluter pays
Air Passenger Duty is a transport policy that is paid by consumers, so causes the price
of flights to rise
...
This will result in a reduction of flight usage
...
This means that the APD causes a reduction in demand for airplanes, an
unsustainable mode (aim of the sustainable transport policy)
...


Role of public and private sectors in resource allocation
How are resources allocated?
-Operations:
 The privatization of buses and railways means more transport supply
operation decisions are taken by the private sector
...

Problems with investment in transport infrastructure by government:
-Roads are quasi-public goods:
 Market mechanism cannot be used to allocate resources
...

-Past under investment by government:
 Transport 2010 anticipates £180bn is needed (half raised private sector PFI)
...

Types of expenditure:
1
...

e
...
motto way construction, rail network upgrades and airport development
...
Current expenditure:
 Involves smaller sums and is annual or short-term in its incidence
...
g
...

Problem of large transport infrastructure projects:

-There is a high scale of investment needed
...

Public Private Partnership: a contractual arrangement between the public and
private sectors in order to fund large-scale projects
...
Injection of additional resources into transport project over and above what it
would otherwise be able to provide
...
Gain in efficiency due to the private sector‟s participation
...
Access to innovative techniques and leading-edge technology
...
Risk transfer to an organization with proven project management expertise
...
A higher rate of return than if funding the whole project
...
An opportunity to apply best practices
...
Some control over assets and user charges
...
Opportunity for indirect benefits from the management of similar projects
...

 Higher incentive to lower average cost
...

 Higher x-efficiency  higher productive efficiency
...

 Allocative inefficiency (P is not equal to MC)
...

-Breaks up the monopoly if many private firms:
 Decrease in economies of scale
...

-Contracts for private firms are expensive and complicated to set-up and change
...

-Government regulation:
 Firms may have to use a certain percentage in profits to reinvest
...


Private Finance Initiatives
-PFI encourages a private investor to manage, build and finance the operation of
public transport
...
g
...

-Contract: construction, services and maintenance
...

Why we do it?
-Efficient
...

-May not paid until delivered and complete (depends on contract)
...

It transfers risk away from the taxpayer
...

-Contracts can be complex, are inflexible and are very costly to change
...

It depends on:
-How much they need to borrow
...

Example of PFI breakdown:
Crossrail:
 Bombardier initially won the contract to supply the trains but it was „sacked‟
...

-Objectives of a firm:
 Profit maximization or service provision
...
x–inefficiency
...
Government failure
...

-Economies of scale of government vs
...


Objectives of transport policy in the UK
Overall objective:

-To achieve the best more efficient allocation of resources in the transport sector:
 How best to forecast future transport demand
...

 How to deal with the growing congestion and other negative externalities
arising from increasing transport use
...

3 key areas:
1
...

-Who should own what has been an important political and social challenge?
 Today, this responsibility rests in the hands of private sector
...
Regulation of transport operations:
-The extent of the relative roles of government and the market
...
Control of transport infrastructure:
-Rail track is back in the hands of the government
...

-Airport and seaport ownership is in the hands of private sector providers
...

-Suffered under-investment:
 Overcrowding
...

 Delays
...

 Lack of choice of how to travel
...

 More attractive
 Accessible to all
...
Investing:
-£180bn investment, through partnership between private and public sector, of which
£121bn is capital investment
...
Modernizing:
-Use the latest technology and exploit latest advances:
 High-speed rail links
...

 Modern trams
...

-Make it easier and safer to get to your destination
...
Integrating:
-Integrated approach:
 Easier connections
...

-Ensure all forms of transport work better together to the benefit of people and
business
...
Cut congestion, reduce pollution and boost choice:
-Congestion was set out to grow by 15% without the plan over the next ten years
...

Rail passengers and freight:
Better track, better trains, better stations and a safer network
-50% increase in passengers and a 80% growth in rail freight in 10 years:
 6000 new carriages and trains
...

 Channel Tunnel Rail Link completed
...

 Congestion in 2010 down by 5% across England, with bigger reductions in
major cities
...

People in rural areas:
-Better transport and more choice for those living in the countryside:
 Up to 50 new bypasses to relieve communities blighted by congestion and
pollution
...

London:
 A quality plus standards on all main bus routes
...

 CrossRail
...
s
...

-CBA takes into account MEB and MEC
...

 Congestion relief (increase comfort)
...

 Employment
...

 House value increases
...

Costs:
 Construction
...

 Fall in car usage (tax losses)
...

 Blight
...
*

*private appraisal doesn‟t acknowledge these
Cost and benefit of Crossrail
-BCR 1:1
...
97 of benefit will be generated
...

Benefits:
-Reduced journey times and lowers the cost of travelling for households and firms
...

How:
-Better information systems:
 Signs at bus stops stating expected arrival time
...

-Improved ticketing arrangements:
 Ability to buy one ticket, online, for a train journey using several train
operators e
...
oyster card
...

-Public transport priority access to roads
...
Increase supply:
-Sustained investment in infrastructure to increase capacity
...

 Increases use of non-renewable resources threatening sustainability
...

2
...
g
...

-Improve traffic light and junction design
...

-Convert hard shoulder safety lanes on motorways into an extra lane for vehicles
...
Manage travel demand:
-Road pricing taxes:
 Increase the private cost of motoring and reduce quantity demanded
...

-Improved information provision:
 Raising public awareness about the environmental impact of transport

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