Transportation Economics
AG BM 102
Introduction
• Transportation costs are a defining issue
for rural America
• Far from markets, far from source of
purchased inputs - Alaska
• It makes farming in isolated areas less
profitable
• Lowers land prices
Efficient Organization within
Market Areas
• How big should schools be?
• How big should hospitals be?
• How big should milk plants be?
• Area in circle grows with square of radius
• Therefore cost of getting more goods
increases, but at a decreasing rate.
• The last mile gained more new area than
the one before
• Amount of output per square mile affects
collection or distribution costs – Red line is
Midwest (no mountains) Blue - PA
Consolidating Schools
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Bigger school can offer more programs
Efficiencies of administration
Richer curriculum
Have a better football team
But students must come farther
Long rides on a school bus
Economics of hospitals
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Small hospitals very expensive to run
Surplus beds
Lack of specialized doctors
Insurance costs
Big hospitals require more patient travel
Plus travel for their families
Helicopter
Hotel stays
Grocery stores
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Large stores have more inventory
Can have more non-foods
Efficiencies of management
Customers must travel farther
Supermarkets killed corner grocery (and
small town grocery)
• Further growth created convenience
stores
Market Boundaries
• Transport costs create captive markets
• They also create logical market
boundaries
• Consider two factories each paying $9/
cwt. for potatoes at the plant gate
• If market B wants more milk raises price
and boundary moves
Concluding Comments
• Once you understand transport costs
some things in rural America make more
sense
• How many feed mills are needed?
• How many milk plants?
• How many Sheetz stores?
• How many Papa John’s?
• Transportation costs are real and sizeable
• They affect behavior in predictable ways