ECONOMICS Johnson Hsu July 2014

Transport economics 1.Transport, transport trends and the economy 2.Market structure and competitive behavior in transport markets 3.Market failure and the role of interventionin transport market 4.Transport economics and government policy

Negative externalities arising from increased transport use  Atmospheric pollution  Noise  Accidents  Congestion  Other – visual intrusion, blight.

Congestion

Evidence on Pollution Transportation sources in North America contribute approximately  47% of nitrogen oxide emissions (NOx)  71% of carbon monoxide emissions (CO)  39% of hydrocarbon emissions (HC)

Policies to correct negative externalities  Various forms of indirect taxation on transport use  Regulations governing the specification of vehicles and their use  Subsidies to encourage greater use of public transport  Information provision by the government

Examples of externalities:  A smoker annoys others with second hand smoke.  A gardener delights a neighbour with his beautiful garden.  A pulp mill pollutes the air and water in town.  A perfume wearer gives a friend an allergic reaction.

Negative Externalities  When economic agents not directly involved, negative externalities can exist, such as pollution. A free market tends to over-produce the good which produces a negative externality, and under produce those with positive externality. If we include costs borne by everyone, then we get social costs, which are the total costs of production no matter who bears them. We say that the total cost is equal to private costs plus external costs.  Negative externalities result in a lower free-market output. In order to make the market produce the optimal amount, we must impose a tax. This is called "internalizing the externality", and forces those involved to account for external costs. There are also externalities in "consumption", when consumption has costs for persons other than those actually consuming the product. Examples of these are cigarettes and second-hand smoke, and drinking alcohol and car accidents.

Positive Externalities  Not all externalities are negative. Some create benefits to those not directly involved. Such is the case with "technology spillover", where new inventions benefit those beyond the inventors.  Some have argued that governments should subsidize research and development, since it will have positive externalities to everyone else. Another method is to allow patents to give monopoly rights to new inventions for a period of time, and encourage such activity. Without this method, there could be an under investment in research. Positive externalities in production means that social cost is less than private cost, and more of the good should be produced than will occur in a free market.  There may also be positive externalities in consumption, such as education. In this case, the social value is greater than the private value.

Solution to Externalities Externalities lead to an inefficient quantity of production and consumption. This can be remedied by either private arrangements or public policy. Externalities can be dealt with by:  Moral codes and social sanctions  Voluntary organizations - charitable groups, lobby groups  Internalization - when activities with complementary externalities are merged into one firm, thus eliminating the externality  Contracts - parties through negotiation can agree as to how to regulate the externality

Social Costs: Damages vs. Protection

Social Costs: Supply and Demand

Social Costs: Causes and Effects. Source:

Any open system influences the world in many ways. Some influences are direct, some are indirect. The transportation system is no exception. Three examples may illustrate the point:  Cars on roads create noise—this we consider a direct effect.  Roads reduce the travel time between two places, which increases the amount of land development along the corridor—this is a less direct effect, not as immediate or obvious as the first. Other factors may intervene to cause or prevent this consequence.  The new land development along the corridor results in increased demand for public schools and libraries—this is clearly an indirect effect of transportation.

Private and social costs divergence

Shadow price  A relative price that is proportional to the opportunity cost for the economy

Hypothecation  A situation where revenue from a tax is directly allocated to some other purpose

Road pricing  A direct charge for the use of a road space

Combating road congestion  Building more roads  Public transport development  Road pricing

Road pricing model  Road user charging  a form of road pricing where a flat-rate charge is made for the use of a stretch of road or access into a designated charging zone  Congestion charging  a direct charge for access to a designated urban charging zone where the main purpose of the charge is to reduce congestion

Approach

Air Transportation: Delay vs. Usage