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
Transport
 The movement of people and goods for
personal and business reasons
 If it refers to:
-People, we speak about passenger
transport measured in passenger
kilometers.
-Products, we speak about freight
transport measured in tonne
kilometers.
Transport
 Is a derived demand; not demanded
for own sake but to meet other
purposes
 Is a service, cannot be stored and is
consumed immediately.
 Intermediate output, it’s just one stage
of processing final products.
 Has distance and time dimension.
Terms:
 Loading refers to % used capacity of
transport.
 Peaking occurs when demand exceeds
supply causing congestion, like in rush-hours.
 Off peak travel takes place outside the ‘rush
hour’ immediately before the start and after
the end of work hours
 transport operations = making decisions
about what the best transport mode is for your
journey.
West Coast Main Line
Cowcaddens subway
station
Air transport in the
United Kingdom
Leeds railway station
Northern Ireland
St Pancras station
Manchester Metrolink
Commuter rail in the
United Kingdom
Water transport
Merchant marine
Transport importance
 Movement
 Purpose
 Carriage
 The mode of transport used
 In infrastructure on which
transport demand is taking place.
Transport is mainly
divided in two parts
 Public transport which includes
the underground, bus or railway
 private transport which
includes the taxi, car or lorry.
The five Central Government
objectives for transport concern:
 Environment
 Safety
 Economy
 Accessibility
 Integration
Problems faced by the
Government
 Infrastructure: past under investment means the
public transport network is badly maintained and
characterised by poor quality and lack of choice
 Current road, rail and air networks are unable to meet
current demand at peak times.
 Use of buses falling outside London. Mergers of bus
companies following deregulation means a lack of
competition, reduced services, higher fares, local
monopolies and high subsides to operators to run non
commercial rural routes
 Projected increase in car usage is unsustainable.
Traffic congestion
Road pricing
Electronic Road Pricing
Road space rationing
Possible Policies
1) Encourage sustainable modes of transport eg walking and
2)
3)
4)
5)
6)
cycling light and public mass transit eg railways.
Reduce the demand for transport by road charging and
encouraging use of non-road alternatives.
Switch freight from road to rail.
Encourage Increased use of mass transit, cycling, walking,
use of alternative freight modes and smaller vehicles.
Enable integrated transport.
Increasing the supply of transport infrastructure may
reduce congestion in the short run but simply generate
additional traffic leaving no net gain in long term traffic
flows. Moreover the environmental impact and further
negative externalities are unsustainable.
Mode of transport
 Means of transport, basically road,
rail, air and sea transport
Transport modes and
model characteristics.
 Transport modes refer to various methods of transport.
When people make transport operations (decisions about
what modes they will use) they will take several things
into account:
- Distance
- Speed
- Urgency of journey
- Convenience
- Reliability
- Capacity ( can 6 people fit in my car?)
- Relative costs of using, say, road or rail
- Risk of delay
Infrastructure
 Anything that provides for the
operation of transport
Transport infrastructure.
 Infrastructure possible in two
categories:
- The transport network, E.G.
roads and railways.
- The transport nodes and
terminals where journeys begin.
E.G. Busstations, railway stations.
Transport infrastructure.
 Better infrastructure causes better transport system
to:
- Improve the mobility of labour
- Create positive externalities. E.G. Roads may
cause benefits for local business and workers.
- Improve international competitiveness:
efficient transport systems minimize travel times
and so lower domestic cost units.
- Improvement of infrastructure is hard because of
the huge amount of time (projects take 5-30 years
and money involved.
Derived demand
 Demand that depends upon the
final output that is produced
What is the function
of transport?
Ans:
to meet the needs of people and firms for
efficient movement.
What is transport
demand?
 The demand for transport is a derived demand, an economic term, which refers
to demand for one good or service in one sector occurring as a
result of demand from another.
 Users of transport are primarily consuming the service not
because of its direct benefits, but because they wish to access
other services.
 Transport demand is about the movement of people and goods
and we travel in order to satisfy a need (work, education,
recreation etc) and we transport goods as part of the overall
economic activity.
 So for example, work-related activities commonly involve
commuting between the place of residence and the workplace.
There is a supply of work in one location (residence) and a
demand of labour in another (workplace), transport (commuting)
being directly derived from this relationship, hence a derived
demand.
 Transport can also be perceived as an induced or
latent demand, that is a demand response to the
addition of transport infrastructure results in traffic
volume increases.
 In economic terms this is due to the reduction in the
price of a commodity, in the transport context an
increased mobility, results in the lower perceived cost
of travel (reduced travel time or delay or improved
reliability), hence increase in demand.
 Additional road capacity results in mode shifts, route
shifts, redistribution of trips, and generation of new
trips as well as longer trips.
What are the determinants of a
household’s demand for
transport by any given mode?
 The cost of running a car
 The relative prices of other modes of





transport
Household income
Car availability/ownership
Size of household
Taste and fashion
Quality factors relating to convenience,
journey times and level of congestion
At the level of a firm, the demand
for a particular mode of freight
transport is determined by;
 The cost
 The convenience in term of ease of
collection and delivery
 The type of goods carried
 The level of service porvided
The use of Elasticity of
Demand in transport.
PED is used by firms to
predict:
 The effect of a change in fares on quantity
demanded.
 The effect of a change in fares on total
revenue & expenditure.
 The effect of a change in indirect tax E.G.
road charging or fuel duty on price and
quantity demanded.
 The effects of price discrimination in
peak/off peak. Price discrimination is where a
monopolist charges different prices for the
same product to different segments of the
market. (different times using transport)
Government and firms use YED(Income
Elasticity of Demand) to predict impact
on demand and revenues of:
 Economic growth: the demand for
luxury items such as air travel increases
proportionately more than products
with low YED such as bus travel.
(Economic growth raises incomes)
 The business cycle: fluctuations in
the demand for transport can be
estimated.
Firms use XED (Cross Elasticity of
Demand ) to estimates to predict
 the impact of a rival’s pricing
strategy on demand for their own
products.
passenger travel
within UK.
Freight Transport
Model characteristics
Passenger transport
Most flexible and convenient mode; only one that can give
door-to-door service; widely used for all types of journey
Private car
purpose; can be used to carry shopping, luggage; lease
enviornmentally acceptable of main modes
Bus
Users are limited by the service provided; most effective on
main corridors in large towns and cities; most attractive to
users when frequency involves only short waiting times
Rail
Speedy carrier of large volumes of passengers over middle to
long distances and for access into cities and large towns
Air
Clearly has advantage of moving passengers over longer
distances at speed; limited use for internal transport in the UK
but widely used elsewhere
Model characteristics
Freight transport
Road
Advantages in terms of convenience, flexibility and
connectivity; suitable for carriage of most goods
Rail
Best suited to moving bulk loads over varying
distances; containers provide an efficient and speedy
means of moving goods to ports and to rest of the EU;
problems of interchange can reduce its efficiency
Air
Appropriate for moving time sensitive and expensive
cargo, mainly over long distances
Sea
Slow but cheap when moving bulk cargoes or
containers, particularly over long distances
Privatisation
Sale of state-owned business
activity to the private sector
The provision of infrastructure
can be in four forms.
 Private goods.
 Public private partnership.
 A publicly owner p/c.
 Direct provision by government.
How government statistics
measure the transport demand?
 Vehicle kilometres (road traffic)
 Passenger kilometres and tonne
kilometres (all mode)
How Department of Transport
to forecast road demand?
 Gross domestic product
 Fuel prices
 Population growth, number of
households
 Car ownership/licence holders
 Industrial output
 Import goods
How important of traffic
forecasts?
 To determine future network needs at
a national and at a local level.
 To estimate where the greatest traffic
bottlenecks are likely to occur
 To be able to forecast the likely effects
of particular transport policies, for
example, road pricing.
.................continued
 Traffic forecasts are used to plan the
operation, maintenance and
improvement of the UK transport
network by estimating how many
people will be travelling by each mode
at any time in the future. As such, they
are an important factor to be considered
when creating transport policy which
will support future travel demands.
Channel Tunnel Traffic
Forecasting
 The growth in UK trade over the last ten to
twenty years has resulted in increased levels
of exports and imports to Europe, particularly
in the European Union (EU).The UK has one
of the largest economies in the world, yet has
a peripheral location in Europe. Economists
and geographers argue that the south east of
England does lie in the so-called 'hot banana'
of Europe, encompassing London, Paris,
Amsterdam, Frankfurt, Berlin and Brussels.
Channel Tunnel Traffic
Forecasting
 As trade develops, so do traffic levels between the UK and
continental Europe. Rapid expansion of the ports at Dover,
Harwich and Felixstowe bears testimony to this fact. Roll-on
roll-off ferries were introduced and these further facilitated
transport links with continental Europe, particularly for
heavy and bulk goods transportation. Additionally, road links
from the east coast ports to the capital have been modernised.
However, this is not in line with government policy
of the last 10 years or so. Movement of freight by rail
is the preferred method. Therefore the Channel Tunnel
and CTRL would aim to push some freight onto the railways,
and also encourage commuting [gloss.] by rail rather than by
car. However the city-city journey time would be the deciding
factor for many commuters.
Channel Tunnel Traffic
Forecasting
 Before the channel tunnel was to be
built, it was therefore essential to
estimate the approximate traffic
levels that would exist in the
transport corridor as a whole.
Factors affecting Channel
Tunnel forecasts
 Natural growth of cross-channel
transport market
 Proportion expected to divert to
tunnel
 Generation of induced traffic
[gloss.] , whether by competitive
price, commercial changes, the UK to
France "booze cruise"
How do we forecast
growth?
 There is no easy answer to this question.
Traditionally it was done by
extrapolation of figures for previous
years, but when a major new piece of
infrastructure is provided the picture
becomes somewhat cloudier. However,
the principles used for roads generally
still apply here to railways.
Passenger traffic
(million passengers)
1994
1995
1996
2003
2013
Et
TRC
Et
TRC
Et
TRC
TRC
TRC
70.92
70.80
74.14
74.23
77.82
77.32
101.12
136.28
- Le Shuttle (cars,
coaches etc)
0.33
0.25
7.14
7.69
11.06
12.36
18.65
23.55
- Rail (Eurostar)(2)
2.52
2.52
9.17
9.17
10.72
10.72
17.12
22.18
- Total
2.85
2.77
16.31
16.86
21.78
23.08
35.77
45.73
- Le Shuttle
0.5%
0.4%
9.6%
10.4%
14.2%
16.0%
18.5%
17.3%
- Rail (2)
3.5%
3.5%
12.4%
12.3%
13.8%
13.9%
16.9%
16.3%
- Total
4.0%
3.9%
22.0%
22.7%
28.0%
29.9%
35.4%
33.6%
existence of the System
(induced traffic)
0.74
0.62
3.58
4.01
4.66
5.56
6.41
8.90
Total passenger market
71.66
71.42
77.72
78.24
82.48
82.88
107.53
145.18
Projections of total
cross-Channel market
(ferries, air, CT)
Projected CT traffic (1)
CT's Market share of
cross-channel travel
(excluding created
traffic)
Traffic created by
 Transport generates negative
externalities (like pollution,
congestion and noise) causing
market failure because the price of
transport doesn’t always include
the cost to society.
Forecasted demand and the
economic basis of transport
forecasts
 Forecasts for E.G. expected economic
confidence, predicted disposal income
and likely oil prices are used by
governments to estimate the future
demand & supply of travel by
mode.
If demand is predicted to exceed supply
the government will try to intervene and
will reduce demand or increase supply.
There are three main
sources of uncertainty in
transport forecasts:
 The future path and values of variables used in a
model (E.G. G.D.P. or oil price) may diverge from
predicted values.
 The specification and stability of statistical
relationships used in the model may change over
time.
 - A model may leave our factors that do not
currently affect consumer behavior but may in
future be important. E.G. eurotunnel predictions
did not take in account the advent of low air flights
between London and Paris.
Some forecasts about Britain’s Transport.
Range of forecasts