Transport economics

Transport economics is a branch of economics founded in 1959 by American economist John

R. Meyer that deals with the allocation of resources within the transport sector. It has strong links
to civil engineering. Transport economics differs from some other branches of economics in that
the assumption of a spaceless, instantaneous economy does not hold. People and goods flow
over networks at certain speeds. Demands peak. Advance ticket purchase is often induced by
lower fares. The networks themselves may or may not be competitive. A single trip (the final
good, in the consumer's eyes) may require the bundling of services provided by several firms,
agencies and modes.[1]
Although transport systems follow the same supply and demand theory as other industries, the
complications of network effects and choices between dissimilar goods (e.g. car and bus travel)
make estimating the demand for transportation facilities difficult. The development of models to
estimate the likely choices between the goods involved in transport decisions (discrete
choice models) led to the development of an important branch of econometrics, as well as a
Nobel Prize for Daniel McFadden.
In transport, demand can be measured in number of journeys made or in total distance traveled
across all journeys (e.g. passenger-kilometers for public transport or vehicle-kilometers of travel
(VKT) for private transport). Supply is considered to be a measure of capacity. The price of the
good (travel) is measured using the generalised cost of travel, which includes both money and
time expenditure.
The effect of increases in supply (i.e. capacity) are of particular interest in transport economics
(see induced demand), as the potential environmental consequences are significant
(see externalities below).

Contents

 1Externalities
o 1.1Traffic congestion
 1.1.1Congestion pricing
o 1.2Pollution pricing
 1.2.1Road space rationing
 1.2.2Tradable mobility credits
 2Funding and financing
 3Regulation and competition
 4Project appraisal and evaluation
o 4.1Appraisal
o 4.2Evaluation
 5Social effects on poverty
 6Car taxation
o 6.1Tax rates on acquisition
 7See also
 8References
 9External links

Externalities[edit]
In addition to providing benefits to their users, transport networks impose
both positive and negative externalities on non-users. The consideration of these externalities –
particularly the negative ones – is a part of transport economics.
Positive externalities of transport networks may include the ability to provide emergency services,
increases in land value, and agglomeration benefits. Negative externalities are wide-ranging and
may include local air pollution, noise pollution, light pollution, safety hazards, community
severance and congestion. The contribution of transport systems to potentially hazardous climate
change is a significant negative externality which is difficult to evaluate quantitatively, making it
difficult (but not impossible) to include in transport economics-based research and analysis.
Congestion is considered a negative externality by economists.[2] An externality occurs when a
transaction causes costs or benefits to third party, often, although not necessarily, from the use
of a public good. For example, manufacturing or transportation cause air pollution imposing costs
on others when making use of public air.

Traffic congestion[edit]
Main article: Traffic congestion

Typical traffic congestion in an urban freeway. Shown here is I-80 Eastshore Freeway in Berkeley,
California.

Traffic congestion is a negative externality caused by various factors. A 2005 American study
stated that there are seven root causes of congestion, and gives the following summary of their
contributions: bottlenecks 40%, traffic incidents 25%, bad weather 15%, work zones 10%, poor
signal timing 5%, and special events/other 5%.[3] Within the transport economics
community, congestion pricing is considered to be an appropriate mechanism to deal with this
problem (i.e. to internalise the externality) by allocating scarce roadway capacity to users.
Capacity expansion is also a potential mechanism to deal with traffic congestion, but is often
undesirable (particularly in urban areas) and sometimes has questionable benefits (see induced
demand). William Vickrey, winner of the 1996 Nobel Prize for his work on "moral hazard", is
considered one of the fathers of congestion pricing, as he first proposed it for the New York City
Subway in 1952.[4] In the road transportation arena these theories were extended by Maurice
Allais, a fellow Nobel prize winner "for his pioneering contributions to the theory of markets and
efficient utilization of resources", Gabriel Roth who was instrumental in the first designs and upon
whose World Bank recommendation[5] the first system was put in place in Singapore. Reuben
Smeed, the deputy director of the Transport and Road Research Laboratory was also a pioneer
in this field, and his ideas were presented to the British government in what is known as
the Smeed Report.[6]
Congestion is not limited to road networks; the negative externality imposed by congestion is
also important in busy public transport networks as well as crowded pedestrian areas, e.g. on the
London Underground on a weekday or any urban train station, at peak times. There is the
classical excess in demand compared to supply. This is because at peak times there is a large
demand for trains, since people want to go home (i.e., a derived demand). However, space on
the platforms and on the trains is limited and small compared to the demand for it. As a result,
there are crowds of people outside the train doors and in the train station corridors. This
increases delays for commuters, which can often cause a rise in stress or other problems.
Congestion pricing[edit]
Main articles: Congestion pricing and Road pricing
Electronic Road Pricing Gantry at North Bridge Road, Singapore

Congestion pricing is an efficiency pricing strategy that requires the users to pay more for that
public good, thus increasing the welfare gain or net benefit for society.[7][8] Congestion pricing is
one of a number of alternative demand side (as opposed to supply side) strategies offered by
economists to address congestion.[9] Congestion pricing was first implemented in Singapore in
1975, together with a comprehensive package of road pricing measures, stringent car ownership
rules and improvements in mass transit.[10][11] Thanks to technological advances in electronic toll
collection, Singapore upgraded its system in 1998[12] (see Singapore's Electronic Road Pricing).
Similar pricing schemes were implemented in Rome in 2001, as an upgrade to the manual zone
control system implemented in 1998;[13][14] London in 2003 and extended in 2007 (see London
congestion charge); Stockholm in 2006, as seven-month trial, and then on a permanent basis
since August 2007[15] (see Stockholm congestion tax).

Pollution pricing[edit]
Main article: Pollution pricing

Energy Efficiency of different Transport Modes

From 2008 to 2011, Milan had a traffic charge scheme, Ecopass, that exempted higher emission
standard vehicles (Euro IV) and other alternative fuel vehicles[16][17][18] This was later replaced by a
more conventional congestion pricing scheme, Area C.
Even the transport economists who advocate congestion pricing have anticipated several
practical limitations, concerns and controversial issues regarding the actual implementation of
this policy. As summarized by noted regional planner Robert Cervero:[19] "True social-cost pricing
of metropolitan travel has proven to be a theoretical ideal that so far has eluded real-world
implementation. The primary obstacle is that except for professors of transportation economics
and a cadre of vocal environmentalists, few people are in favor of considerably higher charges
for peak-period travel. Middle-class motorists often complain they already pay too much in
gasoline taxes and registration fees to drive their cars, and that to pay more during congested
periods would add insult to injury. In the United States, few politicians are willing to champion the
cause of congestion pricing in fear of reprisal from their constituents... Critics also argue that
charging more to drive is elitist policy, pricing the poor off of roads so that the wealthy can move
about unencumbered. It is for all these reasons that peak-periord pricing remains a pipe dream in
the minds of many."
Road space rationing[edit]
Main article: Road space rationing

Traffic congestion persists in São Paulo, Brazil, despite no-drive days based on license numbers.

Transport economists consider road space rationing an alternative to congestion pricing, but road
space rationing is considered more equitable, as the restrictions force all drivers to reduce auto
travel, while congestion pricing restrains less those who can afford paying the congestion charge.
Nevertheless, high-income users can avoid the restrictions by owning a second car.[20] Moreover,
congestion pricing (unlike rationing) acts "to allocate a scarce resource to its most valuable use,
as evinced by users' willingness to pay for the resource". While some "opponents of congestion
pricing fear that tolled roads will be used only by people with high income. But preliminary
evidence suggests that the new toll lanes in California are used by people of all income groups.
The ability to get somewhere fast and reliably is valued in a variety of circumstances. Not
everyone will need or want to incur a toll on a daily basis, but on occasions when getting
somewhere quickly is necessary, the option of paying to save time is valuable to people at all
income levels." Road space rationing based on license numbers has been implemented in cities
such as Athens (1982),[21] México City (1989), São
Paulo (1997), Santiago, Chile, Bogotá, Colombia, La Paz (2003),[22] Bolivia, and San
José (2005),[23][24] Costa Rica.
Tradable mobility credits[edit]
A more acceptable policy on automobile travel restrictions, proposed by transport
economists[25] to avoid inequality and revenue allocation issues, is to implement a rationing of
peak period travel but through revenue-neutral credit-based congestion pricing. This concept is
similar to the existing system of emissions trading of carbon credits, proposed by the Kyoto
Protocol to curb greenhouse emissions. Metropolitan area or city residents, or the taxpayers, will
have the option to use the local government-issued mobility rights or congestion credits for
themselves, or to trade or sell them to anyone willing to continue traveling by automobile beyond
the personal quota. This trading system will allow direct benefits to be accrued by those users
shifting to public transportation or by those reducing their peak-hour travel rather than the
government.[26][27]

Funding and financing[edit]

Corridor Capacity and Infrastructure Costs

Methods of funding and financing transport network maintenance, improvement and expansion
are debated extensively and form part of the transport economics field.[28][29]
Funding issues relate to the ways in which money is raised for the supply of transport capacity.
Taxation and user fees are the main methods of fund-raising. Taxation may be general
(e.g. income tax), local (e.g. sales tax or land value tax) or variable (e.g. fuel tax), and user fees
may be tolls, congestion charges or fares. The method of funding often attracts strong political
and public debate.
Financing issues relate to the way in which these funds are used to pay for the supply of
transport. Loans, bonds, public–private partnerships and concessions are all methods of
financing transport investment.

Regulation and competition[edit]

Regulation of the supply of transport capacity relates to both safety regulation and economic
regulation. Transport economics considers issues of the economic regulation of the supply of
transport, particularly in relation to whether transport services and networks are provided by the
public sector, by the private sector, or a mixture of both.
Transport networks and services can take on any combination of regulated/deregulated and
public/private provision. For example, bus services in the UK outside London are provided by
both the public and private sectors in a deregulated economic environment (where no-one
specifies which services are to be provided, so the provision of services is influenced by
the market), whereas bus services within London are provided by the private sector in a
regulated economic environment (where the public sector specifies the services to be provided
and the private sector competes for the right to supply those services – i.e. franchising).
The regulation of public transport is often designed to achieve some social, geographic and
temporal equity as market forces might otherwise lead to services being limited to the most
popular travel times along the most densely settled corridors of development. National, regional
or municipal taxes are often deployed to provide a network that is socially acceptable (e.g.
extending timetables through the daytime, weekend, holiday or evening periods and intensifying
the mesh of routes beyond that which a lightly regulated market would probably provide).
Franchising may be used to create a supply of transport that balances the free-market supply
outcome and the most socially desirable supply outcome.

Project appraisal and evaluation[edit]

The most sophisticated methods of project appraisal and evaluation have been developed and
applied in the transport sector. The terms appraisal and evaluation are often confused in relation
to the assessment of projects. Appraisal refers to ex ante (before the event) assessment and
evaluation refers to ex post (after the event) assessment.[30]

Appraisal[edit]
The appraisal of changes in the transport network is one of the most important applications of
transport economics. In order to make an assessment of whether any given transport project
should be carried out, transport economics can be used to compare the costs of the project with
its benefits (both social and financial). Such an assessment is known as a cost-benefit analysis,
and is usually a fundamental piece of information for decision-makers, as it places a value on the
net benefits (or disbenefits) of schemes and generates a ratio of benefits to costs which may be
used to prioritise projects when funding is constrained.
A primary difficulty in project appraisal is the valuation of time. Travel time savings are often cited
as a key benefit of transport projects, but people in different occupations, carrying out different
activities and in different social classes value time differently.
Appraising projects on the basis of their supposed reductions in travel times has come under
scrutiny in recent years with the recognition that improvements in capacity generate trips that
would not have been made (induced demand), partially eroding the benefits of reduced travel
times. Therefore, an alternative method of appraisal is to measure changes in land value and
consumer benefits from a transport project rather than the measuring benefits accruing to
travellers themselves. However, this method of analysis is much more difficult to carry out.
Another problem is that many transport projects have impacts that cannot be expressed in
monetary terms, such as impacts on, for example, local air quality, biodiversity and community
severance. Whilst these impacts can be included in a detailed environmental impact assessment,
a key issue has been how to present these assessments alongside estimates of those costs and
benefits that can be expressed in monetary terms. Recent developments in transport appraisal
practice in some European countries have seen the application of multi-criteria decision
analysis based decision support tools. These build on existing cost-benefit analysis and
environmental impact assessment techniques and help decision makers weigh up the monetary
and non-monetary impacts of transport projects. In the UK, one such application, the New
Approach to Appraisal has become a cornerstone of UK transport appraisal.

Evaluation[edit]
The evaluation of projects enables decision makers to understand whether the benefits and costs
that were estimated in the appraisal materialised. Successful project evaluation requires that the
necessary data to carry out the evaluation is specified in advance of carrying out the appraisal.
The appraisal and evaluation of projects form stages within a broader policy making cycle that
includes:

 identifying a rationale for a project

 specifying objectives
 appraisal
 monitoring implementation of a project
 evaluation
 feedback to inform future projects

Social effects on poverty[edit]

In the US those with low income living in cities face a problem called “poverty transportation.”
The problem arises because many of the entry-level jobs which are sought out by those with little
education are typically located in suburban areas. Those jobs are also not very accessible by
public transportation because the transportation was often designed to move people around
cities, which becomes a problem when the jobs are no longer located in the cities. Those who
cannot afford cars inevitably suffer the worst, because they have no choice but to rely on public
transport. The problem is illustrated by an estimation that 70% of entry-level jobs are located in
the suburbs, while only 32% of those jobs are within a quarter mile of public
transportation.[31] More difficult (or more expensive) access to jobs and other goods & services
can act as a ghetto tax.
As a result of the transportation systems in use, but not adequately meeting the needs of those
who rely on them, they tend to generate low revenue. And with minimal revenue or funding the
transportation systems are forced to decrease service and increase fares, which causes those in
poverty to face more inequality. Further those who live in cities with no public transportation
become even more excluded from education and work. In places with no public transport a car is
the only viable option and that creates unnecessary strain on the roads and environment.[32]
Since automobile use tends to be greater than public transportation use, it also becomes the
norm for people to work towards car ownership. Private car ownership has led to a large
allocation of resources towards road and bridge maintenance. But underfunding of public
transportation prevents everyone who needs transportation from having access to it. And those
who can choose between public transportation and private transportation will choose private
transportation rather than face the inconveniences of public transportation. The lack of customers
willing to use public transport creates a cycle that ultimately never leads to the transportation
systems making significant progress.[33] Another reason for low private vehicle ownership among
welfare recipients are the established asset limitations. In the U.S. the asset limit is $1000 per
vehicle. This forces welfare recipients to purchase old and sub standard vehicles in order not to
lose their welfare funding.[31]
There are a number of ways in which public transportation could be improved and for it to
become a better and more enticing option for other people who do not necessarily depend on it.
Some of these include creating networks of overlapping routes even among different operators to
give people more choice in where and how they want to go somewhere. The system should also
function as a whole, to prevent drivers from dangerously racing along routes to increase profit.
Providing incentives to use public transportation can also be beneficial, as ridership increases
the transportation systems can appropriately respond by increasing the frequency along those
transportation routes. Even creating bus only lanes or priority lanes at intersections could
improve service and speed.[34]
Experiments done in Africa (Uganda and Tanzania) and Sri Lanka on hundreds of households
have shown that a bicycle can increase the income of a poor family by as much as
35%.[35] Transport, if analyzed for the cost-benefit analysis for rural poverty alleviation, has given
one of the best returns in this regard. For example, road investments in India were a staggering
3–10 times more effective than almost all other investments and subsidies in rural economy in
the decade of the 1990s. What a road does at a macro level to increase transport, the bicycle
supports at the micro level. Bicycle, in that sense, can be one of the best means to eradicate the
poverty in poor nations.