ECONOMICSECONOMICS

Johnson HsuJohnson HsuJuly 2014July 2014

Transport economicsTransport economics

1.1. Transport, transport trends and Transport, transport trends and the economythe economy

2.2. Market structure and competitive Market structure and competitive behavior in transport marketsbehavior in transport markets

3.3. Market failure and the role of Market failure and the role of interventionin transport marketinterventionin transport market

4.4. Transport economics and Transport economics and government policygovernment policy

TransportTransport The movement of people and goods fThe movement of people and goods f

or personal and business reasonsor personal and business reasons If it refers to:If it refers to:

-People, we speak about passenger tr-People, we speak about passenger transport measured in passenger kilomansport measured in passenger kilometers.eters.-Products, we speak about -Products, we speak about freight trafreight transportnsport measured in tonne kilometers. measured in tonne kilometers.

TransportTransport Is a derived demand; not Is a derived demand; not

demanded for own sake but to demanded for own sake but to meet other purposesmeet other purposes

Is a service, cannot be stored and Is a service, cannot be stored and is consumed immediately.is consumed immediately.

Intermediate output, it’s just one Intermediate output, it’s just one stage of processing final stage of processing final products.products.

Has distance and time dimension.Has distance and time dimension.

Terms:Terms: Loading Loading refers to % used capacity of refers to % used capacity of

transport.transport. Peaking Peaking occurs when demand exceeds occurs when demand exceeds

supply causing congestion, like in rush-supply causing congestion, like in rush-hours.hours.

Off peak travel Off peak travel takes place outside the takes place outside the ‘rush hour’ immediately before the start ‘rush hour’ immediately before the start and after the end of work hoursand after the end of work hours

transport operationstransport operations = making = making decisions about what the best transport decisions about what the best transport mode is for your journey. mode is for your journey.

West Coast Main Line West Coast Main Line

Cowcaddens subway Cowcaddens subway stationstation

Air transport in the Air transport in the United KingdomUnited Kingdom

Leeds railway stationLeeds railway station

Northern Ireland Northern Ireland

St Pancras stationSt Pancras station

Manchester Manchester MetrolinkMetrolink

Commuter rail in the Commuter rail in the United KingdomUnited Kingdom

Water transport Water transport

Merchant marine Merchant marine

Transport importanceTransport importance MovementMovement PurposePurpose CarriageCarriage The mode of transport usedThe mode of transport used In infrastructure on which In infrastructure on which

transport demand is taking transport demand is taking place.place.

Transport is mainly Transport is mainly divided in two parts divided in two parts

Public transportPublic transport which which includes the underground, includes the underground, bus or railwaybus or railway

private transportprivate transport which which includes the taxi, car or lorry. includes the taxi, car or lorry.

The five Central Government The five Central Government objectives for transport objectives for transport concern:concern:

EnvironmentEnvironment SafetySafety EconomyEconomy AccessibilityAccessibility Integration Integration

Problems faced by the Problems faced by the GovernmentGovernment

Infrastructure: past under investment means the Infrastructure: past under investment means the public transport network is badly maintained and public transport network is badly maintained and characterised by poor quality and lack of choicecharacterised by poor quality and lack of choice

Current road, rail and air networks are unable to Current road, rail and air networks are unable to meet current demand at peak times.meet current demand at peak times.

Use of buses falling outside London. Mergers of bUse of buses falling outside London. Mergers of bus companies following deregulation means a lack us companies following deregulation means a lack of competition, reduced services, higher fares, locof competition, reduced services, higher fares, local monopolies and high subsides to operators to rual monopolies and high subsides to operators to run non commercial rural routesn non commercial rural routes

Projected increase in car usage is unsustainable. Projected increase in car usage is unsustainable.

Traffic congestionTraffic congestion

Road pricingRoad pricing

Electronic Road PricingElectronic Road Pricing

Road space rationingRoad space rationing

Possible PoliciesPossible Policies1)1) Encourage sustainable modes of transport eg walking Encourage sustainable modes of transport eg walking

and cycling light and public mass transit eg railways.and cycling light and public mass transit eg railways.2)2) Reduce the demand for transport by road charging anReduce the demand for transport by road charging an

d encouraging use of non-road alternatives.d encouraging use of non-road alternatives.3)3) Switch freight from road to rail.Switch freight from road to rail.4)4) Encourage Increased use of mass transit, cycling, walkEncourage Increased use of mass transit, cycling, walk

ing, use of alternative freight modes and smaller vehicing, use of alternative freight modes and smaller vehicles. les.

5)5) Enable integrated transport.Enable integrated transport.6)6) Increasing the supply of transport infrastructure may Increasing the supply of transport infrastructure may

reduce congestion in the short run but simply generatreduce congestion in the short run but simply generate additional traffic leaving no net gain in long term trae additional traffic leaving no net gain in long term traffic flows. Moreover the environmental impact and furffic flows. Moreover the environmental impact and further negative externalities are unsustainable. ther negative externalities are unsustainable.

Mode of transportMode of transport

Means of transport, basically Means of transport, basically road, rail, air and sea road, rail, air and sea transporttransport

Transport modes and Transport modes and model characteristics. model characteristics.

Transport modes refer to various methods of Transport modes refer to various methods of transport. When people make transport transport. When people make transport operations (decisions about what modes they will operations (decisions about what modes they will use) they will take several things into account:use) they will take several things into account:

DistanceDistance SpeedSpeed Urgency of journeyUrgency of journey ConvenienceConvenience ReliabilityReliability Capacity ( can 6 people fit in my car?) Capacity ( can 6 people fit in my car?) Relative costs of using, say, road or railRelative costs of using, say, road or rail Risk of delay Risk of delay

InfrastructureInfrastructure

Anything that provides for the Anything that provides for the operation of transportoperation of transport

Transport Transport infrastructureinfrastructure. .

Infrastructure possible in two catInfrastructure possible in two categories:egories: The transport network, E.G. roaThe transport network, E.G. roa

ds and railways.ds and railways. The transport nodes and terminThe transport nodes and termin

als where journeys begin. E.G. als where journeys begin. E.G. Busstations, railway stations.Busstations, railway stations.

Transport Transport infrastructureinfrastructure..

Better infrastructure causes better transport systBetter infrastructure causes better transport system to:em to: Improve the Improve the mobility of labourmobility of labour Create positive externalities. E.G. Roads may cCreate positive externalities. E.G. Roads may c

ause benefits for local business and workers.ause benefits for local business and workers. Improve Improve international competitivenessinternational competitiveness: effic: effic

ient transport systems minimize travel times aient transport systems minimize travel times and so lower domestic cost units.nd so lower domestic cost units.

Improvement of infrastructure is hard becausImprovement of infrastructure is hard because of the huge amount of time (projects take 5-e of the huge amount of time (projects take 5-30 years and money involved.30 years and money involved.

Derived demandDerived demand Demand that depends upon Demand that depends upon

the final output that is the final output that is producedproduced

What is the What is the function of function of transport?transport?

Ans:Ans: to meet the needs of people and firto meet the needs of people and firms for efficient movement.ms for efficient movement.

What is transport What is transport demand?demand?

The demand for transport is a The demand for transport is a derived demandderived demand, an economic term, which , an economic term, which refers refers to demand for one good or service in one sector occurrto demand for one good or service in one sector occurring as a result of demand from another.ing as a result of demand from another.

Users of transport are primarily consuming the service not Users of transport are primarily consuming the service not because of its direct benefits, but because they wish to accebecause of its direct benefits, but because they wish to access other services.ss other services.

Transport demand is about the movement of people and goTransport demand is about the movement of people and goods and we travel in order to satisfy a need (work, educatioods and we travel in order to satisfy a need (work, education, recreation etc) and we transport goods as part of the overn, recreation etc) and we transport goods as part of the overall economic activity.all economic activity.

So for example, work-related activities commonly involve cSo for example, work-related activities commonly involve commuting between the place of residence and the workplacommuting between the place of residence and the workplace. There is a supply of work in one location (residence) and e. There is a supply of work in one location (residence) and a demand of labour in another (workplace), transport (coma demand of labour in another (workplace), transport (commuting) being directly derived from this relationship, hencmuting) being directly derived from this relationship, hence a derived demand.e a derived demand.

Transport can also be perceived as an Transport can also be perceived as an induced induced or latent demandor latent demand, that is a demand response to , that is a demand response to the addition of transport infrastructure results in the addition of transport infrastructure results in traffic volume increases.traffic volume increases.

In economic terms this is due to the reduction in In economic terms this is due to the reduction in the price of a commodity, in the transport the price of a commodity, in the transport context an increased mobility, results in the context an increased mobility, results in the lower perceived cost of travel (reduced travel lower perceived cost of travel (reduced travel time or delay or improved reliability), hence time or delay or improved reliability), hence increase in demand.increase in demand.

Additional road capacity results in mode shifts, Additional road capacity results in mode shifts, route shifts, redistribution of trips, and route shifts, redistribution of trips, and generation of new trips as well as longer trips.generation of new trips as well as longer trips.

What are the determinants What are the determinants of a household’s demand for of a household’s demand for

transport by any given transport by any given mode?mode?

The cost of running a carThe cost of running a car The relative prices of other modes of The relative prices of other modes of

transporttransport Household incomeHousehold income Car availability/ownershipCar availability/ownership Size of householdSize of household Taste and fashionTaste and fashion Quality factors relating to convenience, Quality factors relating to convenience,

journey times and level of congestionjourney times and level of congestion

At the level of a firm, the At the level of a firm, the demand for a particular mode of demand for a particular mode of freight transport is determined freight transport is determined

by;by;

The costThe cost The convenience in term of ease of The convenience in term of ease of

collection and deliverycollection and delivery The type of goods carriedThe type of goods carried The level of service porvidedThe level of service porvided

The use of Elasticity of The use of Elasticity of Demand in transport. Demand in transport.

PED is used by firms to PED is used by firms to predict:predict:

The effect of a change in fares on The effect of a change in fares on quantity demandedquantity demanded..

The effect of a change in fares on The effect of a change in fares on total total revenuerevenue & expenditure. & expenditure.

The effect of a change in The effect of a change in indirect tax indirect tax E.G. road charging or fuel duty on price E.G. road charging or fuel duty on price and quantity demanded.and quantity demanded.

The effects of The effects of price discrimination price discrimination in in peak/off peak. Price discrimination is peak/off peak. Price discrimination is where a monopolist charges different where a monopolist charges different prices for the same product to different prices for the same product to different segments of the market. (different segments of the market. (different times using transport) times using transport)

Government and firms use YED(Government and firms use YED(Income Income Elasticity of Demand)Elasticity of Demand) to predict impact to predict impact

on demand and revenues of:on demand and revenues of:

Economic growthEconomic growth: the demand for : the demand for luxury items such as air travel luxury items such as air travel increases proportionately more than increases proportionately more than products with low YED such as bus products with low YED such as bus travel. (Economic growth raises travel. (Economic growth raises incomes)incomes)

The business cycleThe business cycle: fluctuations in : fluctuations in the demand for transport can be the demand for transport can be estimated.estimated.

Firms use XED (Firms use XED (Cross Elasticity Cross Elasticity of Demandof Demand ) to estimates to ) to estimates to

predictpredict

the the impact of a rival’s impact of a rival’s pricing strategy pricing strategy on demand on demand for their own products. for their own products.

passenger travel passenger travel within UK.within UK.

Freight TransportFreight Transport

Model characteristicsModel characteristicsPassenger transportPassenger transport

Private Private carcar

Most flexible and convenient mode; only one that can givMost flexible and convenient mode; only one that can give door-to-door service; widely used for all types of journe door-to-door service; widely used for all types of journey purpose; can be used to carry shopping, luggage; lease ey purpose; can be used to carry shopping, luggage; lease enviornmentally acceptable of main modesenviornmentally acceptable of main modes

BusBus

Users are limited by the service provided; most Users are limited by the service provided; most effective on main corridors in large towns and cities; effective on main corridors in large towns and cities; most attractive to users when frequency involves only most attractive to users when frequency involves only short waiting timesshort waiting times

RailRailSpeedy carrier of large volumes of passengers over Speedy carrier of large volumes of passengers over middle to long distances and for access into cities and middle to long distances and for access into cities and large townslarge towns

AirAirClearly has advantage of moving passengers over Clearly has advantage of moving passengers over longer distances at speed; limited use for internal longer distances at speed; limited use for internal transport in the UK but widely used elsewheretransport in the UK but widely used elsewhere

Model characteristicsModel characteristics

Freight transportFreight transport

RoadRoadAdvantages in terms of convenience, flexibility Advantages in terms of convenience, flexibility and connectivity; suitable for carriage of most and connectivity; suitable for carriage of most goodsgoods

RailRail

Best suited to moving bulk loads over varying Best suited to moving bulk loads over varying distances; containers provide an efficient and distances; containers provide an efficient and speedy means of moving goods to ports and to speedy means of moving goods to ports and to rest of the EU; problems of interchange can rest of the EU; problems of interchange can reduce its efficiencyreduce its efficiency

AirAir Appropriate for moving time sensitive and Appropriate for moving time sensitive and expensive cargo, mainly over long distancesexpensive cargo, mainly over long distances

SeaSea Slow but cheap when moving bulk cargoes or Slow but cheap when moving bulk cargoes or containers, particularly over long distancescontainers, particularly over long distances

PrivatisationPrivatisation Sale of state-owned Sale of state-owned

business activity to the business activity to the private sectorprivate sector

The provision of The provision of infrastructure can be in four infrastructure can be in four

forms.forms.

Private goods.Private goods. Public private partnership.Public private partnership. A publicly owner p/c.A publicly owner p/c. Direct provision by Direct provision by

government.government.

How government statistics How government statistics measure the transport measure the transport

demand?demand?

Vehicle kilometres (road traffiVehicle kilometres (road traffic)c)

Passenger kilometres and tonnPassenger kilometres and tonne kilometres (all mode)e kilometres (all mode)

How Department of How Department of Transport to forecast road Transport to forecast road

demand?demand? Gross domestic productGross domestic product Fuel pricesFuel prices Population growth, number of Population growth, number of

householdshouseholds Car ownership/licence holdersCar ownership/licence holders Industrial outputIndustrial output Import goodsImport goods

How important of How important of traffic forecasts?traffic forecasts?

To determine future network needs To determine future network needs at a national and at a local level. at a national and at a local level.

To estimate where the greatest To estimate where the greatest traffic bottlenecks are likely to occurtraffic bottlenecks are likely to occur

To be able to forecast the likely To be able to forecast the likely effects of particular transport effects of particular transport policies, for example, road pricing.policies, for example, road pricing.

.................continued.................continued Traffic forecasts are used to plan the Traffic forecasts are used to plan the

operation, maintenance and operation, maintenance and improvement of the UK transport improvement of the UK transport network by estimating how many network by estimating how many people will be travelling by each people will be travelling by each mode at any time in the future. As mode at any time in the future. As such, they are an important factor to such, they are an important factor to be considered when creating be considered when creating transport policy which will support transport policy which will support future travel demands. future travel demands.

Channel Tunnel Traffic Channel Tunnel Traffic ForecastingForecasting

The growth in UK trade over the last ten to The growth in UK trade over the last ten to twenty years has resulted in increased levels twenty years has resulted in increased levels of exports and imports to Europe, of exports and imports to Europe, particularly in the European Union (EU).The particularly in the European Union (EU).The UK has one of the largest economies in the UK has one of the largest economies in the world, yet has a peripheral location in world, yet has a peripheral location in Europe. Economists and geographers argue Europe. Economists and geographers argue that the south east of England does lie in the that the south east of England does lie in the so-called 'hot banana' of Europe, so-called 'hot banana' of Europe, encompassing London, Paris, Amsterdam, encompassing London, Paris, Amsterdam, Frankfurt, Berlin and Brussels. Frankfurt, Berlin and Brussels.

Channel Tunnel Traffic Channel Tunnel Traffic ForecastingForecasting

As trade develops, so do traffic levels between the UK As trade develops, so do traffic levels between the UK and continental Europe. Rapid expansion of the ports at and continental Europe. Rapid expansion of the ports at Dover, Harwich and Felixstowe bears testimony to this Dover, Harwich and Felixstowe bears testimony to this fact. Roll-on roll-off ferries were introduced and these fact. Roll-on roll-off ferries were introduced and these further facilitated transport links with continental further facilitated transport links with continental Europe, particularly for heavy and bulk goods Europe, particularly for heavy and bulk goods transportation. Additionally, road links from the east transportation. Additionally, road links from the east coast ports to the capital have been modernised. coast ports to the capital have been modernised. However, this is not in line with government policy However, this is not in line with government policy of the last 10 years or so. Movement of freight by of the last 10 years or so. Movement of freight by rail is the preferred method.rail is the preferred method. Therefore the Channel Therefore the Channel Tunnel and CTRL would aim to push some freight onto Tunnel and CTRL would aim to push some freight onto the railways, and also encourage the railways, and also encourage commuting [gloss.] by by rail rather than by car. However the city-city journey rail rather than by car. However the city-city journey time would be the deciding factor for many commuters. time would be the deciding factor for many commuters.

Channel Tunnel Traffic Channel Tunnel Traffic ForecastingForecasting

Before the channel tunnel was Before the channel tunnel was to be built, it was therefore to be built, it was therefore essential to estimate the essential to estimate the approximate traffic levels that approximate traffic levels that would exist in the transport would exist in the transport corridor as a whole. corridor as a whole.

Factors affecting Factors affecting Channel Tunnel Channel Tunnel

forecastsforecasts Natural growth of cross-channel Natural growth of cross-channel

transport market transport market Proportion expected to divert to Proportion expected to divert to

tunnel tunnel Generation of Generation of induced traffic [

gloss.] , whether by competitive , whether by competitive price, commercial changes, the price, commercial changes, the UK to France "booze cruise" UK to France "booze cruise"

How do we forecast How do we forecast growth?growth?

There is no easy answer to this There is no easy answer to this question. Traditionally it was done question. Traditionally it was done by extrapolation of figures for by extrapolation of figures for previous years, but when a major previous years, but when a major new piece of infrastructure is new piece of infrastructure is provided the picture becomes provided the picture becomes somewhat cloudier. However, the somewhat cloudier. However, the principles used for roads generally principles used for roads generally still apply here to railways. still apply here to railways.

19941994 19951995 19961996 20032003 20132013

EtEt TRCTRC EtEt TRCTRC EtEt TRCTRC TRCTRC TRCTRC

Projections of totalProjections of total

cross-Channel cross-Channel market (ferries, air, market (ferries, air, CT)CT)

70.9270.92 70.8070.80 74.1474.14 74.2374.23 77.8277.82 77.3277.32 101.1101.122

136.2136.288

Projected CT traffic Projected CT traffic (1)(1)

- Le Shuttle (cars, - Le Shuttle (cars, coaches etc)coaches etc) 0.330.33 0.250.25 7.147.14 7.697.69 11.0611.06 12.3612.36 18.6518.65 23.5523.55

- Rail (Eurostar)(2)- Rail (Eurostar)(2) 2.522.52 2.522.52 9.179.17 9.179.17 10.7210.72 10.7210.72 17.1217.12 22.1822.18

- Total- Total 2.852.85 2.772.77 16.3116.31 16.8616.86 21.7821.78 23.0823.08 35.7735.77 45.7345.73

CT's Market share of CT's Market share of cross-channel travel cross-channel travel (excluding created (excluding created traffic)traffic)

- Le Shuttle- Le Shuttle 0.5%0.5% 0.4%0.4% 9.6%9.6% 10.4%10.4% 14.2%14.2% 16.0%16.0% 18.5%18.5% 17.3%17.3%

- Rail (2)- Rail (2) 3.5%3.5% 3.5%3.5% 12.4%12.4% 12.3%12.3% 13.8%13.8% 13.9%13.9% 16.9%16.9% 16.3%16.3%

- Total- Total 4.0%4.0% 3.9%3.9% 22.0%22.0% 22.7%22.7% 28.0%28.0% 29.9%29.9% 35.4%35.4% 33.6%33.6%

Traffic created byTraffic created by

existence of the existence of the System (induced System (induced traffic)traffic)

0.740.74 0.620.62 3.583.58 4.014.01 4.664.66 5.565.56 6.416.41 8.908.90

Total passenger Total passenger marketmarket 71.6671.66 71.4271.42 77.7277.72 78.2478.24 82.4882.48 82.8882.88 107.5107.5

33145.1145.1

88

Passenger trafficPassenger traffic (million passengers) (million passengers)

Transport generates negative Transport generates negative externalities (like pollution, externalities (like pollution, congestion and noise) causing congestion and noise) causing market failure because the market failure because the price of transport doesn’t price of transport doesn’t always include the cost to always include the cost to society.society.

Forecasted demand and Forecasted demand and the economic basis of the economic basis of transport forecasts transport forecasts

Forecasts for E.G. expected Forecasts for E.G. expected economic confidence, predicted economic confidence, predicted disposal income and likely oil prices disposal income and likely oil prices are used by governments to are used by governments to estimate the future demand & estimate the future demand & supply of travel by mode.supply of travel by mode.If demand is predicted to exceed If demand is predicted to exceed supply the government will try to supply the government will try to intervene and will reduce demand intervene and will reduce demand or increase supply.or increase supply.

There are three main There are three main sources of uncertainty in sources of uncertainty in

transport forecasts:transport forecasts: The future path and values of variables used in The future path and values of variables used in

a model (E.G. G.D.P. or oil price) may diverge fa model (E.G. G.D.P. or oil price) may diverge from predicted values.rom predicted values.

The specification and stability of statistical relaThe specification and stability of statistical relationships used in the model may change over titionships used in the model may change over time.me.

- A model may leave our factors that do not cu- A model may leave our factors that do not currently affect consumer behavior but may in furrently affect consumer behavior but may in future be important. E.G. eurotunnel predictions ture be important. E.G. eurotunnel predictions did not take in account the advent of low air flidid not take in account the advent of low air flights between London and Paris.ghts between London and Paris.Some forecasts about Britain’s Transport.Some forecasts about Britain’s Transport.

Range of forecastsRange of forecasts