Transport Economics: Resource
Allocation
Costs In Transport
• Three Types:
• Private Costs
• External Costs (externalities)
• Social Costs =Private Costs + External Costs
Efficient Resource Allocation In
Transport
• As we know efficient resource allocation in
markets exists where MC = MR.
• In the case of transport we can say that
efficient resource allocation will exist at
MSC = MSB.
Efficient Resource Allocation In
Transport
MSC
Cost/Benefit
Optimum
Optimumallocation
allocation
MSB
quantity
Efficient Resource Allocation In
Transport
•
MSC
Cost/Benefit
Optimum allocation
MPC
However as we know in
many markets this is not the
case as private costs fail to
reflect social costs of
provision.
MSB
•
Therefore the market does
not allocate resources at the
socially optimum point.
•
What, therefore are these
costs?
quantity
Private Costs of Transport
• These Fall into Two Categories:
• Fixed costs: the costs of making transport
vehicles available for use.
• Variable costs: costs dependant on the way
in which transport vehicles are used and the
level of service available.
Private Costs of Transport
Mode of Transport
Private Cars
Heavy Goods vehicles
Rail
Air
Sea
Fixed Costs
Variable Costs
Private Costs of Transport
Mode of Transport
Fixed Costs
Variable Costs
Private Cars
Capital costs, insurance, road tax,
depreciation
Fuel, Maintenance, Tyres
Heavy Goods vehicles
Rail
Air
Sea
Private Costs of Transport
Mode of Transport
Fixed Costs
Variable Costs
Private Cars
Capital costs, insurance, road tax,
depreciation
Fuel, Maintenance, Tyres
Heavy Goods vehicles
Capital costs, Licenses,
insurance, depreciation, depot
costs
Fuel, maintenance, drivers wages
Rail
Air
Sea
Private Costs of Transport
Mode of Transport
Fixed Costs
Variable Costs
Private Cars
Capital costs, insurance, road tax,
depreciation
Fuel, Maintenance, Tyres
Heavy Goods vehicles
Capital costs, Licenses,
insurance, depreciation, depot
costs
Fuel, maintenance, drivers wages
Rail
Track costs, capital costs,
interchange costs.
Fuel, maintenance, labour costs
Air
Sea
Private Costs of Transport
Mode of Transport
Fixed Costs
Variable Costs
Private Cars
Capital costs, insurance, road tax,
depreciation
Fuel, Maintenance, Tyres
Heavy Goods vehicles
Capital costs, Licenses,
insurance, depreciation, depot
costs
Fuel, maintenance, drivers wages
Rail
Track costs, capital costs,
interchange costs.
Fuel, maintenance, labour costs
Air
Capital costs, administrative and
overhead charges.
Fuel, maintenance, landing
charges, in-flight services, labour
costs
Sea
Private Costs of Transport
Mode of Transport
Fixed Costs
Variable Costs
Private Cars
Capital costs, insurance, road tax,
depreciation
Fuel, Maintenance, Tyres
Heavy Goods vehicles
Capital costs, Licenses,
insurance, depreciation, depot
costs
Fuel, maintenance, drivers wages
Rail
Track costs, capital costs,
interchange costs.
Fuel, maintenance, labour costs
Air
Capital costs, administrative and
overhead charges.
Fuel, maintenance, landing
charges, in-flight services, labour
costs
Sea
Capital costs, insurance,
administration and overhead
charges
Fuel, maintenance, in-voyage
costs, harbour costs.
Private Costs of Transport
• N.B. – the are marked differences between
modes of transport in terms of the ratio of
fixed to variable costs.
• E.g. Railway operation incurs heavy fixed
costs however once a track is open for use
the average cost per train falls as the no. of
trains using the line increases.
The External Costs of Transport
• Pollution: Climatic, Visual and Noise.
• Community severance and Damage from Vehicles.
• Accidents
• Congestion
External Costs of Transport
•
MSC
In order to account for these external
costs we implement an indirect tax of
a,b,c in order to internalise these costs
to the producer and the consumer.
Cost/Benefit
Optimum allocation
MPC
b
c
a
MSB
quantity
Figures
Track Costs Argument