Transport economics

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Transport economics is a branch of economics that deals with the allocation of resources within the transport sector and has strong linkages with civil engineering. Transport economics differs from some other branches of economics in that the assumption of a spaceless, instantaneous economy does not hold. People and goods flow over networks at certain speeds. Demands peak. Advanced ticket purchase is often induced by lower fares. The networks themselves may or may not be competitive. A single trip (the final good from the point-of-view of the consumer) may require bundling the services provided by several firms, agencies and modes.

1 Supply & demand
2 Externalities
- 2.1 Congestion
3 Funding & financing
4 Regulation & competition
5 Project appraisal and evaluation
- 5.1 Appraisal
- 5.2 Evaluation
6 References
7 See also

[edit] Supply & demand

Although transport systems follow the same supply and demand theory as other industries, the complications of network effects and choices between non-similar goods (e.g. car and bus travel) make estimating the demand for transportation facilities difficult. The development of models to estimate the likely choices between the non-similar goods involved in transport decisions (discrete choice models) led to the development of an important branch of econometrics, and a Nobel Prize for Daniel McFadden.

In transport, demand can be measured in numbers of journeys made or in total distance travelled across all journeys (e.g. passenger-kilometres for public transport or vehicle-kilometres of travel (VKT) for private transport). Supply is considered to be a measure of capacity. The price of the good (travel) is measured using the generalised cost of travel, which includes both money and time expenditure.

The effect of increases in supply (capacity) are of particular interest in transport economics (see induced demand), as the potential environmental consequences are significant (see externalities below).

[edit] Externalities

In additional to providing benefits to their users, transport networks impose both positive and negative externalities on non-users. The consideration of these externalities - particularly the negative ones - is a part of transport economics.

Positive externalities of transport networks may include the ability to provide emergency services, increases in land value and agglomeration benefits. Negative externalities are wide-ranging and may include local air pollution, noise pollution, light pollution, safety hazards, community severance and congestion. The contribution of transport systems to potentially hazardous climate change is a significant negative externality which is difficult to evaluate quantitatively, making it difficult (but not impossible) to include in transport economics-based research and analysis.

[edit] Congestion

Traffic congestion is a negative externality imposed by each road user on every other road user (or potential road user). Within the transport economics community, road pricing is considered to be an appropriate mechanism to deal with this problem (i.e. to internalise the externality) by allocating scarce roadway capacity to users. Capacity expansion is also a potential mechanism to deal with traffic congestion, but is often undesirable (particularly in urban areas) and sometimes has questionable benefits (see induced demand).

Congestion is not limited to road networks; the negative externality imposed by congestion is also important in busy public transport networks as well as crowded pedestrian areas.

[edit] Funding & financing

Methods of funding and financing transport network maintenance, improvement and expansion are debated extensively and form part of the transport economics field.

Funding issues relate to the ways in which money is raised for the supply of transport capacity. Taxation and user fees are the main methods of fund-raising. Taxation may be general (e.g. income tax), local (e.g. sales tax or land value tax) or variable (e.g. fuel tax), and user fees may be tolls, congestion charges or fares). The method of funding often attracts strong political and public debate.

Financing issues relate to the way in which these funds are used to pay for the supply of transport. Loans, bonds, public-private partnerships and concessions are all methods of financing transport investment.

[edit] Regulation & competition

Regulation of the supply of transport capacity relates to both safety regulation and economic regulation. Transport economics considers issues of the economic regulation of the supply of transport, particularly in relation to whether transport services and networks are provided by the public sector (i.e. socially), by the private sector (i.e. competitively) or using a mixture of both.

Transport networks and services can take on any combination of regulated/deregulated and public/private provision. For example, bus services in the UK outside London are provided by both the public and private sectors in a deregulated economic environment (where no-one specifies which services are to be provided, so the provision of services is influenced by the market), whereas bus services within London are provided by the private sector in a regulated economic environment (where the public sector specifies the services to be provided and the private sector competes for the right to supply those services - i.e. franchising).

The regulation of public transport is often designed to achieve some social, geographic and temporal equity as market forces might otherwise lead to services being limited to the most popular travel times along the most densely settled corridors of development. National, regional or municipal taxes are often deployed to provide a network that is socially acceptable (e.g. extending timetables through the daytime, weekend, holiday or evening periods and intensifying the mesh of routes beyond that which a lightly regulated market would probably provide).

Franchising may be used to create a supply of transport that balances the free-market supply outcome and the most socially desirable supply outcome.

[edit] Project appraisal and evaluation

The most sophisticated methods of project appraisal and evaluation have been developed and applied in the transport sector. It should be noted that the terms 'appraisal' and 'evaluation' are often confused in relation to the assessment of projects. Appraisal refers to ex ante (before the event) assessment and evaluation refers to ex post (after the event) assessment.^[1]

[edit] Appraisal

The appraisal of changes in the transport network is one of the most important applications of transport economics. In order to make an assessment of whether any given transport project should be carried out, transport economics can be used to compare the costs of the project with its benefits (both social and financial). Such an assessment is known as a cost-benefit analysis, and is usually a fundamental piece of information for decision-makers, as it places a value on the net benefits (or disbenefits) of schemes and generates a ratio of benefits to costs which may be used to prioritise projects when funding is constrained.

A primary difficulty in project appraisal is the valuation of time. Travel time savings are often cited as a key benefit of transport projects, but people in different occupations, carrying out different activities and in different social classes value time differently.

Appraising projects on the basis of their supposed reductions in travel times has come under scrutiny in recent years with the recognition that improvements in capacity generate trips that would not have been made (induced demand), partially eroding the benefits of reduced travel times. Therefore an alternative method of appraisal is to measure changes in land value and consumer benefits from a transport project rather than the measuring benefits accruing to travellers themselves. However, this method of analysis is much more difficult to carry out.

Another problem is that many transport projects have impacts that cannot be expressed in monetary terms, such as impacts on, for example, local air quality, biodiversity and community severance. Whilst these impacts can be included in a detailed environmental impact assessment, a key issue has been how to present these assessments alongside estimates of those costs and benefits that can be expressed in monetary terms. Recent developments in transport appraisal practice in some European countries have seen the application of multi-criteria decision analysis based decision support tools. These build on existing cost-benefit analysis and environmental impact assessment techniques and help decision makers weigh up the monetary and non-monetary impacts of transport projects. In the UK, one such application, the New Approach to Appraisal has become a cornerstone of UK transport appraisal.

[edit] Evaluation

The evaluation of projects enables decision makers to understand whether the benefits and costs that were estimated in the appraisal materialised. Successful project evaluation requires that the necessary data to carry out the evaluation is specified in advance of carrying out the appraisal.

The appraisal and evaluation of projects form stages within a broader policy making cycle that includes: