Transportation Economics/Introduction
Transportation systems are subject to constraints and face questions of resource allocation. The topics of supply and demand, as well as equilibrium and disequilibrium, arise and give shape to the use and capability of the system.
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[edit] What is Transportation Economics?
Transport Economics studies the movement of people and goods over space and time. Historically it has been thought of as located at the intersection of microeconomics and civil engineering, as shown on the left.
However, if we think about it, traditional microeconomics is just a special case of transport economics, fixing space and time, and where the good being moved is money, as illustrated on the right.
Topics traditionally associated with Transport Economics include Privatization, Nationalization, Regulation, Pricing, Economic Stimulus, Financing, Funding, Expenditures, Demand, Production, and Externalities.
[edit] Demand Curve
How much would people pay for a final grade of an A in a transportation class?
- How many people would pay $5000 for an A?
- How many people would pay $500 for an A?
- How many people would pay $50 for an A?
- How many people would pay $5 for an A?
If we draw out these numbers, with the price on the Y-axis, and the number of people willing to pay on the X-axis, we trace out a demand curve. Unless you run into an exceptionally ethical (or hypocritical) group, the lower the price, the more people are willing to pay for an "A". We can of course replace an "A" with any other good or service, such as the price of gasoline and get a similar though not identical curve.
[edit] Demand and Budgets in Transportation
We often say "travel is a derived demand". There would be no travel but for the activities being undertaken at the trip ends. Travel is seldom consumed for its own sake, the occasional "Sunday Drive" or walk in the park excepted. On the other hand, there seems to be some innate need for people to get out of the house, a 20-30 minute separation between the home and workplace is common, and 60 - 90 minutes of travel per day total is common, even for nonworkers. We do know that the more expensive something is, the less of it that will be consumed. E.g. if gas prices were doubled there will be less travel overall. Similarly, the longer it takes to get from A to B, the less likely it is that people will go from A to B.
In short, we are dealing with a downward sloping demand curve, where the curve itself depends not only on the characteristics of the good in question, but also on its complements or substitutes.
[edit] The Shape of Demand
What we need to estimate is the shape of demand (is it linear or curved, convex or concave, what function best describes it), the sensitivity of demand for a particular thing (a mode, an origin destination pair, a link, a time of day) to price and time (elasticity) in the short run and the long run.
- Are the choices continuous (the number of miles driven) or discrete (car vs. bus)?
- Are we treating demand as an absolute or a probability?
- Does the probability apply to individuals (disaggregate) or the population as a whole (aggregate)?
- What is the trade-off between money and time?
- What are the effects on demand for a thing as a function of the time and money costs of competitive or complementary choices (cross elasticity).
[edit] Supply Curve
How much would a person need to pay you to write an A-quality 20 page term paper for a given transportation class?
- How many would write it for $100,000?
- How many would write it for $10,000?
- How many would write it for $1,000?
- How many would write it for $100?
- How many would write it for $10?
If we draw out these numbers for all the potential entrepreneurial people available, we trace out a supply curve. The lower the price, the fewer people are willing to supply the paper-writing service.
[edit] Supply and Demand Equilibrium
As with earning grades and cheating, transportation is not free, it costs both time and money. These costs are represented by a supply curve, which rises with the amount of travel demanded. As described above, demand (e.g. the number of vehicles which want to use the facility) depends on the price, the lower the price, the higher the demand. These two curves intersect at an equilibrium point. In the example figure, they intersect at a toll of $0.50 per km, and flow of 3000 vehicles per hour. Time is usually converted to money (using a Value of Time), to simplify the analysis.
Costs may be variable and include users' time, out-of-pockets costs (paid on a per trip or per distance basis) like tolls, gasolines, and fares, or fixed like insurance or buying an automobile, which are only borne once in a while and are largely independent of the cost of an individual trip.
[edit] Equilibrium in a Negative Feedback System
Supply and Demand comprise the economists view of transportation systems. They are equilibrium systems. What does that mean?
It means the system is subject to a negative feedback process:
An increase in A begets a decrease in B. An increase in B begets an increase in A.
Example: A: Traffic Congestion and B: Traffic Demand ... more congestion limits demand, but more demand creates more congestion.
[edit] Disequilibrium
However, many elements of the transportation system do not necessarily generate an equilibrium. Take the case where an increase in A begets an increase in B. An increase in B begets an increase in A. An example where A an increase in Traffic Demand generates more Gas Tax Revenue (B) more Gas Tax Revenue generates more Road Building, which in turn increases traffic demand. (This example assumes the gas tax generates more demand from the resultant road building than costs in sensitivity of demand to the price, i.e. the investment is worthwhile). This is dubbed a positive feedback system, and in some contexts a "Virtuous Circle", where the "virtue" is a value judgment that depends on your perspective.
Similarly, one might have a "Vicious Circle" where a decrease in A begets a decrease in B and a decrease in B begets a decrease in A. A classic example of this is where (A) is Transit Service and (B) is Transit Demand. Again "vicious" is a value judgment. Less service results in fewer transit riders, fewer transit riders cannot make as a great a claim on transportation resources, leading to more service cutbacks.
These systems of course interact: more road building may attract transit riders to cars, while those additional drivers pay gas taxes and generate more roads.
One might ask whether positive feedback systems converge or diverge. The answer is "it depends on the system", and in particular where or when in the system you observe. There might be some point where no matter how many additional roads you built, there would be no more traffic demand, as everyone already consumes as much travel as they want to. We have yet to reach that point for roads, but on the other hand, we have for lots of goods. If you live in most parts of the United States, the price of water at your house probably does not affect how much you drink, and a lower price for tap water would not increase your rate of ingestion. You might use substitutes if their prices were lower (or tap water were costlier), e.g. bottled water. Price might affect other behaviors such as lawn watering and car washing though.
[edit] Provision
Transportation services are provided by both the public and private sector.
- Roads are generally publicly owned in the United States, though the same is not true of highways in other countries. Furthermore, public ownership has not always been the norm, many countries had a long history of privately owned turnpikes, in the United States private roads were known through the early 1900s.
- Railroads are generally private.
- Carriers (Airlines, Bus Companies, Truckers, Train Operators) are often private firms
- Formerly private urban transit operators have been taken over by local government from the 1950s in a process called municipalization. With the rise of the automobile, transit systems were steadily losing passengers and money.
The situation is complicated by the idea of contracting or franchising. Often private firms operate "public transit" routes, either under a contract, for a fixed price, or an agreement where the private firm collects the revenue on the route (a franchise agreement). Franchises may be subsidized if the route is a money-loser, or may require bidding if the route is profitable. Private provision of public transport is common in the United Kingdom.
[edit] Properties
The specific properties of highway transportation include:
- Users commit a significant amount of their own time to the consumption of the final good (a trip). While the contribution of user time is found in all sectors to some extent, this fact is a dominant feature of highway travel.
- Links are collected into large bundles which comprise the route. Individual links may only be a small share of the bundle of links. If we begin by assuming each link is “autonomous”, than the final consumption bundle includes a large number of (imperfect) complements.
- Highway networks have a very specialized geometry. Competition, in the form of alternative routes between origin and destination is almost always present. Nevertheless there are large degrees of spatial monopoly, each link uniquely occupies space, and spatial location affects the user contribution of time.
- There are significant congestion effects, which occur in the absence of pricing and potentially in its presence.
- Users are choosing not only a route for a trip, but whether to make that trip, choose a different destination, or not travel on the highway network (at a given time). These choices are determined by the quality of that trip and all others.
- Individual links may serve multiple markets (origin-destination pairs). There are economies achieved by using the same links on routes serving different markets. This is one factor leading to a hierarchy of roads.
- Quantity cannot be controlled in the short term. Once a road is deployed, it is in the network, its entire capacity available for use. However, roads are difficult to deploy, responses to demand are necessarily slow, and for all practical purposes, these decisions are irrevocable.
[edit] Thought questions
- Should the government subsidize public transportation? Why or why not?
- Should the government operate public transportation systems?
- Is building roads a good idea even if it results in more travel demand?
[edit] Sample Problem
[edit] Key Terms
- Supply
- Demand
- Negative Feedback System
- Equilibrium
- Disequilibrium
- Public Sector
- Private Sector
