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    Transport Economics 3rd Edition Kenneth Button University Professor, School of Public Policy, George Mason University. USA Edward Elgar Chelteskam, UK + Northampton, MA, USA 8 Kenneth Button 2010 All rights reserved. No putt of this publication may be teprodaced, stored in a retrieval systems or ransmited in any form o by any means, ezetronic, mechanica! or photocopying, recording, or otherwise without the prior permission of the publisher. Published by dard Elgar Publibing Limited ‘The Lypintts| 15 Lansdown Road Cheltenhaen Glos GL50 214, UK Edward Elgar Publishing, Inc. William Bratt House 9 Dewey Court Northampton Massachisatts 01060 USA ‘A catalogue record for this book: is available from the Betish Library Library of Congress Control Number: 2009937750 f 5 Mixed Sources RSTn FSC TMEncunhcee ISBN 978 | 84064 189 9 (eased) ISBN 978 | $4064 191 2 (paperback) Printed aud bound by MPG Books Group, UK Contents Preface 1 Transport and Economics LI Transport economies 1.2 The emergenee of modem transport economics L3 The scope of the subject L4 The economic characteristis of transport 1.5 The Framework of the book Further reading 2. ‘Transport, Fransport Markets and Transport Fadusteies 2.1 Introduction 2.2 The global picture 2.3. Transport at the national level 24 Local transport 25 Emerging treads Further reading 3° Movement, Trunsport and Location 3.1 The desire for movement 3.2 The ‘chicken or egg problem 3.3. Transport and industrial location 3.4 Gateways and corridors 3.5 Output, market area and transport costs 3.6. Urban transport and land values 3.7 Transport and urban wage rates Further reading 4 The Demand for Transport 4.1 Introduction 4.2 Factors that influence travel demand 43 The notion of a ‘need’ for transport 4.4 ‘The valuation of travel time savings 4.5. The demand for car ownership Further reading 5. The Direct Costs of Transport 5.1 The supply of transport » 9 20 29 36 4l 47 48 4B 49 3 68 a 6 78 8 80 96 108 15 116 116 vi {TRANSPORT ECONOHECS, 380 £DIFON 5.2. Fixed and variable costs 5.3 Economics of scale, scope, density and experience 54 Specific, joint and common costs 5.5 Problems of common cost allocation - the road and rail track eases 5.6 Transport user eosts and the notion of generalized costs 5.7 The bunching of services 8 Elements of economic performance 5.9 Costs and the measurement of economic eliciency Further reading ‘The External Costs of Transport 6.1 Introduction 6.2 What are exiernalites? 6.3. ‘Tansport and the environnient 6A The valuation of externalities 6.5 ‘The magnitude of the eavironmental externality problem 66 Energy use 6.7 Introduction to trafic congestion 6.8 The economic costs of congestion, 69 Some refinements on the basic congestion model 6.19 Some broad agaregate calculations Further reading Pricing of Transport Services Tl 1 73a Ta 1S 16 Ww 18 19 710 The principles of pricing Matelsing supply with demand Marginal cost pricing Difficulties of ‘second-best’ situations Price differentiation, price discrimination and yield management Pricing with stochastic demand The problem of the peak ‘Transport subsidies, operational objectives and pricing Market instability, suboptimal sapply and the empty core Indirect pricing Further reading Containing the Environmental Costs of Transport 8.1 8 83 84 85 8.6 Introduction The basic approaches ‘The Coasian solution ~ tradable permits, The ‘polluter-pays’ principle More on eavironmental standards Transport subsidies and the environment 161 161 161 164 let 73 187 191 7 19 mM 205 207 207 208 212 216 18 235 237 241 24 2a7 250 251 251 252 283 256 261 264 10 8.7 Protecting the suiferers 88 Energy use 8.9. Safety and accidents Further reading Optimizing Traflic Congestion 9.1 The economic approach 9.2 ‘Road pricing 9.3 Examples of urban road pricing 94 Some difficulties with road pricing 9.5 Ontcomes of read pricing implementation 9.6 Parking poticies 9.7 Congestion pricing at airports 98 Congested seaports 9.9 Non-congestion pricing options Further reading: Some Economics of Transport Logisties 10.1 Introduction 10.2 What is “transport logistics 10.3 ‘Transport costs, warehousing and inventory holdings 104 Consolidation and trans-shipment 10.5. ‘The mode choice 10.6 Urban toxisties 10.7 Green logisties 108 International logisties 10.9 Security Further roading, Investment Criteria ~ Private and Public Sector Analysis IL} The importance of infrastructure 1.2 Basic principles 11.3. Commercial and social approaches to iatvestament 114. The theory of cost-benefit analysis, 115 Coping with network elfects 1.6 CBA in practice and variations oa the theme 117 Comparability between uppraisal techniques HLS Assessing the effeet on nationa! income 119° Some institutional considerations Porther reading ‘Transport Planning and Forecasting 12.1 The development of transport planning 122. The theory of transport planning 123. Traffic modeling and forecasting ‘CONTENTS: 268 270 2 283, 284 285 290 202 302 30s 307 320 321 325 227 327 Ry 331 335 337 341 343 M7 354 356 356 398 361 365 371 373 382 385 388, 391 302 392 396 401 vii vit “TRANSPORT ECONOMICS, IRD EDITION 12.4 Sequential travel demand forecasting 12.5 Disaggregate modeling 12.6 Interactive and stated preference modeling, Further reading 13. ‘Transport and Developmestt 13.1 Transport and economic development 13.2 Beonomic growth theory and transport 13.3. Transport infrastructure investment and economic productivity 134 The multiplier impacts of a transport investimest 13.5. Transport economics in less developed countries 13.6 The transport policy of the European Union 13.7 Transport and regional and urban development Further reading 14 The Economie Regulation of Transport 14.1 The broad issues 14.2 Theories of regulation 14.3 The regulation of monopoly power 14.4 Priorities in transport policy 14.5 Alternative paths for regulatory reform 14.6 Suudying regulatory reform 14,7 Coordination vin the market, of by direction? Further reading, Index 405 412 als 41s. 419 419 420 426 429 434 44} 452 439 461 461 463 469, 473 483 488 493 ayt 499 Preface Publishers are always pressing for new editions of books, and particularly text= books. This is logical, after all they are commercial enterprises, anid new editions ‘of a book make the old ones reduadant and the used books, collectors’ items, The more editions they pubiish, the larger the sales checks, Authors get paid royalties and are olten enthusiastic collaborators. In practice, however, one should never rush into writing a new edition: there should be motivation besides money, ‘A new textbook becomes important when the old one becomes outdated, In subject areas such as economics, much of the basic theory is well established, although not always liked or accepted, by policy makers; perhaps this unpopu- larity is not surprising, efter all Thomas Carlyle did call economies “The dismal scicnee” some two centuries ago. ‘There are, however, movements forward in ‘our basic understanding of the economies, including that which is particularly germane to transport matters. There are also developments in the techniques available for estimating the effects of transport on society, antd conversely on the way secia! change impacts on transport. This, combined with « continual aceu- mulation of data over time, and the ability to mine previous studies to look at time trond alfects or, in exceptional cases, adds to onc knowledge. ‘There are also continual shifts in the way that policy makers treat transport: the political economy of the subject. Just consulting daily newspapers cleurly shows the importance of tvansport in public perception. Transport issues of ll kinds fll the column inches of these publications, as does the time spent on trans- port and travel in television ews propranis and documentaries. This public inter~ est inevitably draws the altention of policy makers sensitive to the pesceptions of Weir constituents Since the ast edition of the book, some 14 years ago, quitea lot has changed. ‘Our understanding of the factors influencing demand for transport services has mioved forward, and our approaches to modeling and estimating the ways i ‘which a variety of factors influence the use of Lransport has evolved. Challenges that were pertinent in the early 1999s remain but many, such as global warming emissions and concerns over (errorism, have grown in importance, International Iransport is now more important, as globalization has grown, deiven in part by institutional changes, but also facilitated by developments in such things as information technology. The role of logisties, which has a major economies component, has grown as trade has expanded, Of couse, nol all things have changed, The basic economic principles of supply and demand remain as valid as ever; itis the context and focus that has changed. Nevertheless, more up-to-date examples make their understanding easier; context helps the assimilation of ideas Equally the scale and dotails of TRANSPORT ECONOMICS RD EDATION the transport system have inevitably responded to internal and external factors over nearly a decade and & hall, and itis time to update the factual background agsinst which transport economics is set, even if it does not materially affect the underlying theories. So this new edition takes on board these important changes. But it also bas a iffeceint physical form. 1 is tonger. This is because the original edition was aimed mainly, although far from completely, al the UK market where universities nor mally bad a 10-vweek term. There was basically « chapter per class. Changes have taken place in thc educational world, and the earlier edition seems to have found ‘a wider market than expected. This edition is thus longer, some 14 chapters and ‘more suited (oa semester system. This is not just padding added to il in students’ sime: there is serious restructuring, redralting of material seen in editions one aad two, and new material Additionally, the referencing is slightly different. The Harvard Manwul, with its author. date Format, which forms the basis of most economics journal and ‘monograph referencing has been set aside for a simple Chicago approach, There are no extensive lists of references but rather a few important citations are offered ogetbier with a brief section of further reading at tie conclasion of cach chapter. This isin response to comments from users of the carlir editions whe found the Harvard system distracting in what is essentially a textbook, [As before, the book is a mixture of prose, tables, igures and equations. The aims to help understanding rather than to overpower, or impress, the reader with technique. hope that teachers, students and other readers find the new edition useful, Kenneth Burton 1 Transport and Economics oonuanies iventrenaely useful as «form of employment jor economists Jolin Kenneth Galbraiti 1.1 Transport* Economics Over a quarter of a century ago f opened the first edition of Tremsport Econoinies with 2 quote from an address to the UK's Chartered Institute of ‘Transport by K.1.W. Alexander! which made the rather sober point that despite the importance of transport in the economy, “the number of academic econo mists who specialize exclusively in transport could probably be counted! on two hands. If one adds to these economists the applied economists employed in the transport business and the speciaiist consultants working exclusively in that field I would be sucprised if the total number excceded sixty o¢ seventy’. This is aetna rather strange given the fascination that transport has held moze gener ally for very eminent economists; indeed John Maynard Keynes once confessed ‘when young, “I find economics incteasingly satisfactory, and 1 think am rather g00d ait. F vant to manage a railway. or organize a trust or at least swindle the investing public’ Unfortunately, the situation as seen by a knowledgeable expert in the mid- 1976s, contimved to largely pertain in the 1990s when the second edition of Transport Economics was published. One may now have to bring one's feet andl toes into Alexander's calculations, but even in 2009 there are stil relatively few academics that specialize in the subject. There still remains, however, quite a lot ol, often not very helpful, dabbling by those whose interest lay more in lobbying for a favorite mode of transport than sociat welfare, and who tz9 £0 use economics {o justify their own personal prejudices Alexander's statement also highlighted the fact thet many transport eco- nomic issues have traditionally Seen under-researched and olten poorly tnder- stood, particularly by non-economists, The situation has changed somewhat since that time, as witnessed by the introduction of a number of seriows academic journals over the years that regularly publish papers on transport economics + The word “snanspor is used Untouphout this book rether thas the US “transportation? despite the use of American vocubulury elsewisere. This is to avoid contusion for Betis readers, and it avoids abvious problems for Australinns for whom the term ‘transporta- tion’ has peculiar eonsotations "IGLW. Alexander, ‘Some economic problems of the wansport industry’, Chersered Tistinute of Transport rua, 36,306 8, 1975. “TRANSPORT ECONOMICS, SRD ELTON, Most notable of these are the Jounal of Transport Econuntics and Poliey. which first appeared in 1967, and the Liternadional Journal of Transport Economies. Both of these date back to that general era, but so do journals sueb as the Jornal of Urban Economies and Regionad Science and Urhan Ecanonties which also often carry transport material, fn addition, mode-specific journals have emerged, such a8 Mavitime Economies amet Logisttes, whieh foces on particular transport indus tries. But, nevertheless, compared to many areas of economic study, transport still remains remarkably neglected. ‘This dovs not mean that there have not been periodic surges of interest in some particularaspects of transport economies, Indeed, in the mid-1980s Clifford Winston,? when examining developments in transport economics, was able to comment on “a current intensity [of interest in the field} not witnessed for more than fifty years’. This surge was mainly related to the analysis of the impacts of ‘more liberal, oF to use the American term, “deregulated”, transport markets that were emerging. More recently. the role of transport as « facilitator of economic ‘growth bas attracted attention both at the mioro and at the macroeconomic levels. Matters of transport security and the Snancing of transport networks lave been hemes attracting attention in the early part of the twenty-first century, as has the role of transport in international trade, ‘This relative lack of contemporary academic interest in transport economics is surprising because transport problems have in the more distant past stimilated major developments in economic theory (including the devetopment of the notion of consumer surplus by French economists/engineers, such as Jules Dupuil, in the 1840s; the refinement of cost allocation models by such famed US economists such as John Bates Clark and Frank Taussig in the early part of the last century: ‘and the examination of the marginal cost pricing principle to improve the charg- 19 of rail service and work on congestion and the envionment by Arthur Pigow in the 19203), More recently, the advent of computers has encouraged work on applied econometrics (for example, the development of discrete chioice models in con- sumer theory by Dan McFadden, and refinements to flexibie form cost functions) ‘and os mathematical programming (lor example, the use of data enveloprent analysis to assess the relative efficiency of different suppliers) using transport case studies as a basis for analysis, Nonetheless, transport economists in universities are thin on the ground, and their numbers in businesses and government are not much larger. In purt, the relatively small nnmber of clearly identifiable specialist transport economists may be attributed to the diverse nazure of the industries involved in their work which range from taxicabs to oil (ransportation, with their various institutional and yectmical peculiarities, Non-eonomists ~ Inwyers and engineers often have specialist knowledge of the industry and « limited background ie economies, At the applied level. numerous, stnall firms do not have the resources 2 C. Winston, ‘Concepraal developments in the economies of transportation: an interpre Use survey’ foul af Beonamie Lirerane, 3, 51-98, 1985, "TRANSPORT ANO ECONOMICS to employ full-time specialists that characterize a “transport economist” although that does not mean they Go not have individuals that nlf some economics role in the organization. i may also be explained by the tendency, wihich to some extent still remains, for physical planners and transport engineers to dominate substantive investment and policy decision making within the scetor. The emphasis in this case is, on the personal transport side, more to do with the physical manifestation of travel, namely trips and journey numbers, rather than the demand for movement and the ability of the system to meet these aspirations: Where economics is used, its often within the engineering framework and carried through by engineers ~ the so-called ‘engineering economics’. This situation has only gradually been chang- {ng with innovations in management and planning, and in the way that political institutions have evolved. So whut is “modern transport economics’, how dl. it evolve and whet are the intellectual and practical driving forces behind it? 1.2. The Emergence of Modern Transport Economics Economics is not easy to define.’ Famously the Chicago economist Jacob Viner is, meant to have said, ‘economics is what economists do's not exactly helpful to the outside, But itis generally agreed that it is about Inuman behavior and resource allocatios, andl in particolar about the allocation of scarce resourees. H focuses a Jot on the role of markets in doing his, bt not exclusively 50. Various aspects of it border on a variety of other disciplines such as law, sociology and engineering, ‘often making boundaries vague. I also may be esentially descriptive in the sense of it approaching a vaiue-neutral science ~it tells us that in most conditions the quantity demanded of something will fall fits price rises ~ but itcan also contain elements of prescription: it isa ‘good? thing for social welfare for prices to be low, ‘The later is often called ‘political economy’. All these elements, and some others, ‘become important when studying the economies of transport. What has bees called “Modem Transport Economies’ by Michael Thomson! it his book of the same name, began slowly to take shape about 45 years ago. Up tunfil thaé time, as Rakowski® points out, “the feld liad essentially been in a state of semi-dormancy since thie 1920s’, and while considerate institutional studies had becn conducted, very litle analytical work as we would understand it today hhad been attempted. Indeed, the two standard American textbooks on transport economies into the late 1960s were D.F. Pregramt’s Transportation: Ecoutonies and Public Policy. and Philip Locklin’s Economics of Transportation, which had only five or so line drawings between them and no equations. 3 RE, Backhouse and S.G- Medema, ‘On the definition of economies’, Jounal of Economie Perspectives, 23,721 33, 2009, 41M. Thomson, Modem Transport Eeunemntes, Harmondsworth: Penguin. 1975 SAP. Rakowski. Transport Economies: A Guide io Informacion Sources, Detroit: Gale Reseaieh Ca. 1975. “TRANSPORT ECONOMICS 3RD EDITION {1F one looks for a watershed in the history of modern transport economies it ‘would probably be the publication of John Meyer, Mesion Peck, Walter Stenason and Chasles Zwick’s Beonomics of Conspetition in te Transportation Industries in 1959, which provided a state-of-the-art review of resource allocation problems in the sector coupled with rigorous statistical unalysis, There had been a number of seminal economic papers rekiting to transport that appeared prior to this, includ- ing James Buchanan's re-examination of congestion and Martin Beckmann and co-workers’ set of studies, but Meyer et as book really set the tone for the way in whieh transport issues are analyzed, Interest in transport issues expanded throughout the 1960s with, for example, Willium Vickery’s analysis of oad charging and tke role of public transit subsidies, an Little and James Mirrlees’s development of work on investment appraisal, ‘and in particular on cost benefit analysis, Richard Quandt and William Baumol's improvements in methods of transport demand modeling based on Daniel McFadden’s work and the ideas of Kelvin Lancaster, Leon Moses and Harold Williamson's development of innovative metheds of travel tine evaluation, and so on, All these are topies that we shall return to tatet albeit in their miore modern manifestations, and in many cases with some real-world examples of applications, ‘The changes were not all academic, This period also saw public pokey makers become more interested in the role of economies in improving, actual decision making. In many countries, specialist departments were established it national or municipal governments to examine the economic implications of various transport policy options. The 1960s and carly 1970s saw a slew of official reports appear, for example, in the United Kingdom, including studies on Road Track Costs, the Smeed Report on The Beonomies of Road Pricing. the Beeching Report en The Reshaping of British Raihiys and the report of the Commission on the Third London Airport, which sot ou the framework Tor ways in whic: economies helps in mega-project investment appraisal. The European Union, then just estabiished as the European Economic Community, produced reports and plans in the early 1960s for integrating and coordinating economic approaches to transport pro- vision across much of Europe. In the United States this was the peried of the large land-use transport studies that included the Chicago Area Transportation Stuéy from the late 1950s, the Puget Sound Regional Transportation Study. and the Detroit Regional Transportation and Land-use Stuely. These wore essentially engineering studies seoking to deal with mounting congestion problems, bul eco. nomic analysis was part of the assessinent process. While it is never easy to explain the timing of change, the renewed research Interest in transport in the 1960s, especially in the United States, Rekowski tributes (0 “the problems of physical distribution and the development of a new lief which has come to be called business logistics’ “expanded interest in all phases of urban transportation’ and ‘a great dea! of research in the areas of wansportation in the developing countries". Ken Gwilliam? echoes these themes © KM. Gwillia .cview of “Transport Eeonomies™, Beonensic Joust, 9, 677-8, 1980, "TRANSPORT AND ECONOHECS but places particular emphasis on the growing problems of usbun transport in the 1960s and the recognition that land use and transport needed to be considered together. and usuatly simultaneously, if the problems were (o be tackled success fully, As a result of this, he argues, “the boundaries between transport economies and urban and regional planning were obscured”. While the broad underlying intellectual thrust of modern transport analysis has not changect significantly since the 1970s and early 1970s, namely the use of economic theory to enhance transport efficiency, in the broadest sense the topics of focus have shifled to some extent and the economic tools used have been improved and Ane-tuned. The Tele 1970s saw particular concern in many parts of the workd with the macroeconomic problems associated with “Stagfation’: the simultaneous occurrence of high fevels of unemployment and poor economic growth with inilation, The failure of a large part of the US railzoad industry may be seen as a eatalyst for some of the particular changes in transport, The adoption of Reaganomics in the United States, and Thatcherisin in the United Kingdom. involving similar approaches towards what became known ws “supply- side economics’ fed toa honing-in on reducing costs in heavily regulated indus tries such as transport “The empirical analysis of those such as Bill Jordan and Michael Levine pro- vided evidence of excess costs associated with regulation, the theories of Baumol and others on contestable market structures offered @ new way of looking at competitive forces, and Harolé Demsetz’s work provided basis for enhancing the efficiency with which transport infrastructuns is provided and maintained, Work by @ variety of Chicago economists, including George Stigler and Sam Peltzmaa, began to focus on the motivations of those responsible for framing and administrating economic regulatory regimes, arguing that they seldom served the public interest. The outcome was what some have called the "Age of Regulatory Reform’? whieh focused on removing distorting regulations and allowing areater ‘market flexibility ‘More recently, pubtic concern combined with academic curiosity has led to economists switching more of their attention to matters pertaining to the envi- ronmental implications of transport supply, the role that economies can play in ‘enhancing the transport logistics supply chain, and the financing of infrastruc- ture. Transport. as we shall see later in the book. can impose considerable strains ‘on the eavironment and, although this has leag been recognized, the seale and nature of transport has changed. as tas scientific knowledge on the implications, of these strains ~ and especialfy in the context of global impacts, Equally, globalization, intemationalization and domestic economic growth within many countries have been, in part, the result of improved logistics, inctud- ing just-in-time supply chain management. Although often not appreciated. many of those improvements in logistis are the result of the application of basic eco- nomic principles, Finally, madem transport requires an extensive infrastructure "4, Bution and D. Swann fois), The Age af Regedatory Reform, Onlord: Oxford University Press, 1989. “TRANSPORT ECONOMICS, SRB EDITION of rouds, rail tracks, ports, air traffic control systems, bridges and so on. The construction and the maintenance of this infrastructure have to be paid for While in the past transport economics has focused primarily on deciding which ‘elements to build or repair, the taxpayer bearing much of the financial burden, there is now concern about the methods of finance to use and the overall amoutet of national resources that have to be devoted to this type of infrastructure, This issue is increasingly important in many developed economies as ole infrastruce ture becomes obsolete or uceds maintenance, but is perhaps more critical in lower-income nations that lack anany Key transport networks. ‘When considering this background, it is important to ensphasize that trans- port economics is not distinet [rom all other branches of economies. Indeed, imauyy of the seminal papers on the subject have appeared in the general econom- jes literature and have often beer produced by individuals with a broad interest jin economics rather than transport specialists Nevertheless, in most arcas of study, as our knowledge las increased, it has become difficult, if not impossible, for cconomists to foliow developments in all branches of their discipline; the Renaissazce man or woman of econotnics isin the past, There has been an inevi- table increase in specialization. Transport economics has, in general terms, & Jong history but, as Rakowski and others suggest. it was only in the 1970s or so that it becomea major field of academic study within universities and only subsequently «did a substantial body of specialists emierge, So the modern transport economist is.a relatively new beast, But what isi that he/she studies? 1.3. The Scope of the Subject The scope of cach of the subdisciptines within economics (for example, agricul- tural economies, development economics and public sector economics) is deter mined not by particular schools or philosophies but rather by the type of subject iatter examined and the problens tackled. Transport economists are interested in the economic problems of moving goods and people ~ they are not normally so concemed with either the industries producing the vehicles and infrastructure Girerali manufacturing, rod construction companies, ship building and so om) or with some of the very wide implications of transport policy (For exemple, on the balance of payments), although matters to do with the environment certainly atteact increasing amounts of their attention. Of course, this does not meu that transport issucs are viewed in complete isofation from their wider context, but it ‘docs mean that the main emphasis and thrust of analysis is ditected towaeds the ‘more immediate transport implications, While such of the economic analysis of transport issues is al the micro level (for example, looking a the decisions of individuals of firms) or at the meso level (focusing on transport industries or the importance of transport or @ specific ‘egion) there is also some interest in the maeroeeonomic impacts of transport, for example, ou its effects on national productivity, globafization of trade, oF labor force migration. TWUNSFORT AND ECONOMES This book secks 10 give adequate coverage to all levels of aewregation, Initially, however, we step back a litle and spend time considering the economic institutions within which transport services are supplied and individuals and firms seek its services. Much of the theorctical economics that we encounter is rather abstract and largely assumes away the role of ecouomic iustitutions, although this is now changing gradually, Bot institutional strectures are important, Elementary economies, for example, talks about such things as perfect competition, but such markets could not exist without laws giving property rights to theit suppliers and without contracts between sellers and buyers. As the Nobel Prize-winning ‘economist Ronald Coase? said in the context of economic reforms in the former USSR countries, “These ex-communist countries are advised to move to a market economy, and their leaders wish to do so, but without the appropriate institutions ‘no market economy of any significance is possible’ ‘Traditionally, however, within economics, institutions have been treated as endogenous and man-made ~ sometimes deliberately, sometimes not ~ rather than something that is to be given, Few economists spent tinte studying them and (hose that did. such as Thorstein Veblen and John Kenaeth Galbraith, were treated in their day as rather marginal to main-stream economnies ~ some even considering them to be ‘sociologists! However, this view is changing, and as Oliver Williamson” observed: “We are still very ignorant about institutions. Chie among the causes of ignorance is that institutions are very complex. That ‘neoclassies! economies was dismissive of institutions and that much of organiza- sion theory lacked scientific ambitions have also been contributing factors’. ‘The so-called “New Institutional Economies’ kas moved the ecanomic study ‘of institutions eway from being a largely descriptive, legalistic and traditional his- torical way of viewing the world to one that ollers microanalysis of such issues as (o wiy evonomic institutions have emerged the way they bave. It has also moved) away from a largely negative way of looking at neoclassical economies, to one with ils own theoretical constructs and (ools of analysis. This approach importantly sets the neoolassical economies that underlies most of the work in transport eco- nomics up until the 1990s, into a larger context, Figure 1.1 isa simplified diagram that sets out four levels of social analysis It is fairly self-explanatory except that the thick arrows show constraints that come down from higher levels of analysis, while the dotted arrows indicate the direction of feedbacks. The data offered in the figure are the rough frequency in years over which change takes place, Long-term issues tend 10 receive less attention in transport economics the further one moves from narrow resource allocation matters. Their importance cannot be neglected, however. There have been, perhaps, two major societal ‘changes that have impacted on culture in the broadest sense over the past century ‘or so, aad have had important ramifications for transport, * RAH. Coase, “The institutional structure of production’, American Economic Review, 82, 713-9, 1982. 9 OE, Williamson, “The new institutional economies: taking stock, looking abead’, ouanal of Economies Literasure, 8, 595-613, 2000, “TRANSPORT ECONOMICS, 3K EDMON Resour aloeation mel | Neoetessicl ecovomia/gency srmploymeat moe y a Gaveinanes, specially sorta ‘Transaetion cost economies le 10 yeaes ¥ Thlittional environment, formn res 30 100 years y * Eunbedsdness, oustoms ‘ald raion: Social theory oo years or more Economics of propesty ghispolteal seanamy Figure 1.1 fastuifons cd econuanien First, there was the demise of the Soviet Union and the move away from cen alized planning, together with the gradual uptake of capitalism in China, These, and similar developments elsewitere, zepresent major shiNts in the embedded aut tude of these countries and with this have come new ways of thinking about the role oF transport in society and the ways in wich it should be provided. Second, ‘here have been changing attitudes towards free trade, and with these have come ‘globalization’. The resaltant approach to {aris and other barriers to interna Honal economic policies have had profound effects on shipping, ait transport, and ‘many forms of surface transport. Going back to the global contfet of 1914-18, the subsequent establishment of the League of Nations paved the way for this jn modern times, and it has extended since the end of the Second World Wa is not just that such global institutions as the World Bank, the International “Mavitime Organization, and the International Civil Aviation Organization exist, bout rater shat these is now a belief that they have @ durable role to play in society “This forms a basis for new economic systems and an embedded global view on how business can be conducted. ‘The institutional environment involves formal laws, regulations and rules, and at @ higher level, ‘constitutions’. It is ulso concerned with the instruments of lav ~ legislatures and bureaucracies ~ and mecharisms of enforcement. For example, it relates to legal reforms such as the 1978 Airline Dereguiation Act which liberalized domestic aviation in the United States, o: the Single European Market Act in Europe in 1986 that ied to @ phased deregulation of transport and other markeis within Europe. But it also importantly includes te issue of property rights and their enforcement. So-called “Pigouvian externalities’, such as pollution, and ‘cinb good” problems of traffic congestion. are the most obvious areas of interest for transport economists in this regard, From an economics of “TRANSPORT AND ECONOMICS transport perspective, the question becomes one of getting the rules right to meet socictal demands Governance, basically the way business is done, is important, and bere she economic emphasis is on notions of contracts. Strictly. it is about eratting order, and thereby mitigates conflict and realizes mutual gains, There are many factors — cuitural, structural, cognitive and political ~ that influence the way in which these formal and informal institutions develop. If we take shipping as a case study, governance here may be seen as embodying such things as the evolving siructise of coordination of shipping activities that began with ‘conferences’ ~ essentially cartels ~ in the 1970s and has developed through consortia into stra- tegic alliances, whereby changes cecur discretely rather than continuously, These, like their brethren ia the airline incustry, ean Invelve agreements on such things as schedules and rates with flexibility about which vessels carry any particular assignments, There are also contractucil estes within the larger integrated supply chains that, for example. tie. 1o varying degrees, shipping with other elements in the logistics system. most immediately ports but extending, beyond this, Governance is dilleront from government in the sense that the former invotves informal agree- ments within a legal structare. As an example, the United States deregulated its omostic airline industry by an Act of Congress, whereas the United Kingdom ‘essentially got the same result because the Civil Aviation Authority reiaterpreted the existing sel of laws. Because of high transaction costs, the recent trend has been for n considerable amount of contract management and! dispute settlement ction to be dealt with directly by the parties involved — in other words. within anarkel frameworks rather than by legal ection. Finally, there are the ongoing processes involving the day-to-day activities that (ake place involving transport. This is essentially the traditional bread-and- butter of micro- and mesoeconomic analysis taking ialo account the specific nuances of transport. Resource allocation issues have since the days of Adam Smith, and more particularly Alited Marshall in the late (890s centered on getting the marginal conditions right. To assess how this might be achieved in theory. und how it materializes in practice, requires some notion of the natuce of the relevant cost and demand conditions - the guts of most introductory econom- ics courses. The basic principles, although the muances are still being refined, are well understood, and much of the recent attention in uransport economies bas therelore been on quantification and application in a network context. Historically, however, this has not always been the case. Much of the analysis ‘of market structures in transport, for example, paid scant heed to the network ature of the industry amd ipso facto to network externalities. Much of the interest until $0 years or so. ago, as we have hinted at previously. had been on traditional economic parameters such as market concentration ratios, the degree of product differentiation and the level of verticat integration. While all these can be important instruments in the economist’ tool bag. the network nature of the transport, and the service nature of its outputs, received much less direct atiention in the analysis. Much of the early work on transport demand modeling 10 “TRANSPORT ECONOMICS, IRD EO-TION was also either devoid of any of these network features, or embraced them in a mechanical fashion, But newwork features are important, although they often add complexity to useful analysis, ‘All network service industries have essentially identical economic chara teristics. Their output is non-durable, although they normally require significant amounts of infrastructure. Phere are also often very significant external benefits which, tied with various forms of scale fects, produce network economies. From the consumer's perspective, these external economies are refated to the fact that the larger the number of finks in « network the greater the degree of connectivity, and with this the larger the choiee set available to him/her ~ often called “econo~ mies of market presence’. On the cost savings side, the ability, where this is most eflicient, to channel trafit¢ throtigh bubs, rather than carry trafic direcdy beween origins and destinstions, creates economies of scope (cost savings by combin ing traffic) and of density (the more intensive use of the mode). But complex notworks can also create costs. and most especially congestion can develop on link roads or light paths, oF at hubs such as sea- and airports in the shipping and aviation comext, So what does all this mean regarding the day-to-day work of transport cconomists? In summary, an understanding of economic institutions is now gen- crally seen as important for analyzing broad transport issues; nevertheless, the ‘main ‘tools’ of the transport economist are still taken directly from the kil-bag, of standard mfero- and mesoeconomic theory, although one should add that the actual instruments used have changed significantly over the years, The pre Second World War emphasis centered on the transpoct industries (that is, dhe railways, coad haulage, shipping and so of.) and, in particular, on ways in whiclt the transport supply could be improved within a largely regulated structure so that maximum benefit would be derived from public aud private transport opern- tions. The situation was summarized by one geographer who fell that transport economics al that time was concerned almost entizely with ‘matters of organiza- tion, competition and charging, eather than with the effects of transport facilities on economic activities’? “Fo some extent — particularly in relation to international transport and, to a lesser extent, inter-urban transpost - this interest has remained, However, more recently it has been supplemented by concera with the wider welfare and spatial implications of transport. Greater emphasis is now placed on the envie ronmental and distributional effects of the-transport system and, in some cases, market efficiency is seen as an undesirably narrow eriterion upon which to base major decisions. As Alexander argued, in the speech cited at the beginning of the chapter, one of the most important roles for ecouomists is ¢o make clear the overall resource cosis of transport rather than just the accounting costs, 1 is no accident, perhaps, that mach of the early work in cost-benefit unalysis (CBA) was in the transport field © AM, O'Connor, Retinays and Development fa Uganda. Oxford: Oxford University ross lor the Bast Afriean Ensiitute of Social Research, 195, ‘Transport economics has, like virtually ali other branches of economies, become more quantitative in recent years. The dominant pre-war idea thal eco- nomics is concerned mainly with establishing broad principles (for example, that the quantity demanded rises, ceteris paribus, as price Ralls) has given way, with the advent of econometric techniques and the computer age, together with improved data sources, to attempts at detailed measurement {that is, @ rise of x tons in the quantity demanded will, ceteris paritws, follow from a Sy fell in unit price). ‘Transport economists are now heavily involved in trying to assess the precise quantitative effect of diferent policy options and with forveasting Tikely changes in transport demand, At the public policy level, the increasing sophistication of transport opert- tions, combined with both the Jong lead times that are requived for full policy implementation and the financial costs involved, place mounting strains upon economists to produce useful, quantified predictions of future trends. The increased appreciation of the commercial benefits of better forecasting and costing as part of the supply-chain management process, has led to greater employment of numerate economists in the private sector. From the relatively small base of the 960s, transport economists have now ‘become more established in most areas of transport policy’ making at all admin- istrative leveis, Their increased interest in the overall weifare consequences of different transport strategies. together with 2 willingness to attempt some form of quantitative assessment, has led to transport economists becoming more closely involved in major transport planning exercises. They have an established role in advising on appropriate actions at the national policy formutation tevel, but this has aso spread down to a mote specific function at the local planning level. At the strategic level, transport economists, for example, have made a signilleant ‘contribution to the urban transport plénming in industrial countries since the late 1960s, and have been involved in many detailed appraisals of tralfic investment and management schemes in developed countries ‘The particelar advances made in transport investment appraisal - most notably the development of CBA techniques as practical tools of analysis - ed to the adoption of economic criteria for the assessment of many large-scale invest- iment projects in the 1960s and 1970s (for example, the Third London Airport scheme and Victoria Underground Line in the United Kingdom). Recen: refine- ments have resulted in rather more standardization, and uniform CBA proceduses arc employed asa standard method of small-scale transport project appraisal (for example, the COBA package used in UK trunk road investment appraisal and the procedures favored by the World Bank For appraising transport schemes in low-income countries). ‘As argued earlier, the surge of reguiatory reform and market fiberalization from the late 1970s, whict will be discussed later in the book steras, atleast partly, from the empirical work of applied economists, and the regulatory reginacs that subsequently emerged are largely economics based. The dichotomy between the wealth of the industrial nations and the poverty of Third World countries has resulted in large-scale programs being initiated to va 12 ‘TRANSPORT ECCROMICS. 20D EDITION stimulate the economic development of the Third World. Much of this aid has ‘been in the form of monies and resources to improve transport provision. Over 20 percent of World Bank lending, for example, goes on transport projects, as does about [5 percent of total Bank assistance — grants, expertise and 50 on. Although it is not shtogether agreed that aict actualy stimolates growth nor that. if it does, transport investments are the most suitable projects (0 Finance, i is nevertheless important that within the narrow confines of transport efficiency these monies are spent wisely. Transport economists have become increasingly involved in the ‘Third World in transport project appraisel work. Large private transport businesses often employ econormists but more often they, and smaller enterprises. make use of the many specialist consultancy com- punies that offer expert advice, The growth in interest in supply-chain logistics, ‘which spans all movement and storage of raw maerials, work-in-process inven- tory, and finished goods from point of origin to point of consumption, and within that just-in-time management, fas led 1o a much more implicit invorpora- tion of economies into transport activities One way of lookiig at this is through the notion of “value chain’ initiated by Michael Porter.'? A value chain isa chain of aetivities, Products pass through all activities of the chain in order, and at each activity the product gains some value, The chain of activities uives the produets more added value than the sam of adided values of all activities, Capturing the value generated aiony the chain is ‘the new approach takeu by many management strategists. For example, « mam facturer might requite its parts suppliers to be Jocated near its assembly plant to minimize the cost of transport, or it may require regular delivery of components to keep production going. while holding minimum stocks of the component, By exploiting the upstream and downstream information flowing along the value chain, the firms seek to bypass intermediaries creating new business models, or in other ways create improvements in its value system. Figure 1.2 provides a simpiified generio value chain, The key point about itis the extensive number of linkages required through a production process from the initial extraction of raw materials to the final delivery of goods to x market and their subsequent servicing, Transport is, at various fevels of aggregation and in

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