Costs of Transportation

1. Internal and External Costs

 Internal costs: are those borne by system
operators and/or users. It includes construction,
maintenance, operation, and road user costs (e.g.
fuel)
 External costs: are those borne by non-users such
as noise and air pollution.
A) Internal Costs:
 Internal costs involves both the accounting costs
and the opportunity costs

 The accounting costs are the real monetary costs,

while the opportunity costs are the missed
benefits.

 Accounting costs such as construction,

maintenance, and operating costs.
Capital vs. Operating Costs
Mode Capital Costs Operating Costs
Automobiles Vehicle, Roadway, Traffic
signals
Fuel, Labor,
Railroads Rail cars, stations, signal
Maintenance,
systems
Airlines Airports, traffic control Supplies
systems
Ships Ports, Ships

Type of Costs Fixed costs Variable costs

 Fixed costs: are the costs that do not change with
the level of output. They are independent of
output and must be paid even if no output is
produced.

 Variable costs: are costs that change with the

level of output.

 Total costs: is the sum of fixed costs and variable

costs.
Marginal Costs and Average Costs
 Marginal cost: refers to the change in the
total cost when the quantity produced
changes by one unit.
MC = dTC/dQ

 Average cost: refers to the total cost divided by the

total number of units produced.
AC = TC/Q
Example:
 Suppose that the number of journeys are given as shown in
the table below, calculate the missing transport costs:
Units of Total Fixed Variable Average Marginal
output Cost Cost Cost Cost Cost
0 1 1
1 4 1
2 1 8
3 1 7
4 1 22
5 1 80
2. External Costs
Types of external costs of transportation modes:
1. Congestion.
2. Accidents.
3. Noise.
4. Air pollution.
5. Climate change.
6. Infrastructure wear and tear for road and
rail.
 Costs of transportation are divided
into

Social costs Private (or internal costs)

They are reflecting all costs They are directly borne by the
occurring due to the transport user, such as wear
provision and use of and tear and energy cost of
transport infrastructure, vehicle use (fuel), own time
such as wear and tear costs costs, transport fares and
of infrastructure, capital transport taxes and charges.
costs, congestion costs,
accident costs,
environmental costs.
External costs: are considered as the difference between social
costs and private costs.
External cost components and level of externality
Cost component Private and social costs External cost

Costs of scarce All costs for traffic users and society Extra costs imposed on all other
infrastructure (time, reliability, operation, missed users and society exceeding the
(congestion) economic activities) caused by high private costs.
traffic densities.

Accident costs All direct and indirect costs of an Part of social costs which is not
accident (material costs, medical considered in own and collective
costs, production losses, suffering risk anticipation and not covered
and grief caused by fatalities). by (third party) insurance.

Environmental costs All damages of the environment Part of social costs which is not
(health costs, material damages, considered (paid for).
biosphere damages, long term risks).
Determining the Level of Externality for each
Cost Component
Cost component The level of externality
Costs of scarce Parts of the congestion costs are paid by the waiting and delay
infrastructure costs of the users.
(congestion)

Accident costs Parts of the accident costs are paid by third-party (insurance),
other parts are paid by the victims having themselves caused
the accident (either through own insurance or through
suffering uncompensated damage, etc.).

Environmental costs Parts of environmental costs could be seen as already paid for,
such as through energy taxes or environmental charges (e.g.
noise-related charges on airports).
Internalization of Transport External Costs
This means making external effects part of the decision
making process of transport users.
This can be done directly through regulation, i.e.
command and control measures, or indirectly through
the market-based instruments (e.g. taxes, charges,
emission trading, etc.).

The payment for the external costs (such as taxes) is

measured by the marginal external cost (MEC).

∴ MEC = T
To achieve efficiency, the marginal external cost
(MEC) has to be taken into consideration by adding
it to the marginal private cost (MPC) in order to
determine the marginal social cost (MSC) of using
transportation.

Therefore, MSC = MPC + MEC = P

Example:
 If you are given the following supply and demand functions
for a transport mode:
Qs = 5000 P
Qd = 400,000 – 1000 P
MEC = T = $20

Required:
1. Find the equilibrium price and equilibrium quantity?
2. Determine the efficient level of output?
3. What was the market problem? By how much?
Congestion:

 Is the situation at which the user of the transport

system are taking higher than the average time for
their travel trip.

Therefore, capacity for the road or transport system is

approaching its maximum limit.
Reasons for Congestion
The main reason for congestion are:
1. Dealing with the public transportation as an
inferior good.
2. As the fixed cost of buying and owning vehicles
decreases, drivers are more encouraged to use
their own vehicles. Consequently, the number of
vehicles in operation increases.
Results of Congestion
1. Waste of time for both consumers and producers.
Therefore, increasing business cost.
2. Increase the pollution and noise because vehicles are
in use for longer time.
3. More stress.

The increase in pollution and noise, and the stress are

causing health problems.
 Remedies for Congestion

Increase the Reducing Adopting ICT

supply of Demand road pricing
road space system
A. Increasing the Supply of Road Space
 Government can increase the supply of road space by
building more roads, which will have two consequences:

i) With more roads, drivers are encouraged to drive more

which will lead to more congestion. This is called
“rebound effects” because increasing the supply of road
spaces aimed instead of reducing congestion.

ii) There will be large costs needed for building roads.

B) Reducing Demand
 Demand can be reduced by either:
i) Reducing car ownership, or
ii) Reducing car usage.
This can be done through:
- Raising fuel taxes or car taxes.
- Raising the driving license fees.
- Providing better public transportation and bus lanes.
- Increase parking charge.
However, this could result in revenue losses for firms
operating in the cars industry and job losses for those who
are working in these firms.
C) Road Pricing System (Congestion Charges)
 The government can adopt road pricing system by
charging cars for the use of road-space.

This system was first adopted in Singapore in 1998.

Where electronic detectors are placed on bridges to
detect cars passing and debits the accounts of the
registered cars without requiring cars to stop and pay
the charge this system is called electronic toll
collection (ETC).
 Criticism of road pricing systems:
Although the road pricing system seemed to
be successful in reducing traffic, it is
criticized for;
- Being very costly to implement, and
- Can be subject to technical problems.
D) Information and Communication Technology
(ICT)
The development of mobile applications in order to
provide information about the road conditions for all
participants in the traffic at the proper time with
intention to reduce costs and loss of time as well as
reduction of congestion in urban areas.
There is also intention to reduce pollution by harmful
gases and reduce noise level.

These mobile applications such as: bey2olak, Wasalny and

Google Traffic on Google Maps that displays traffic
conditions on major roads and highways.