Revision notes

Resource Allocation Issues in Transport
Task: What are the main transport problems facing the government?
• Capacity : Current road, rail and air networks are unable to meet current demand at peak times.

• Sustainability: Projected increase in car usage is unsustainable.

• Infrastructure: past under investment means the public transport network is badly maintained and characterised by poor quality and lack of choice.

• 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

• The government is unsure if the electorate will accept satellite technology for charging will work.

Task
Explain why the ‘best’ allocation of resources is not always possible?
The characteristics of transport mean such conditions are not always possible.
Transport markets fail because:
• Operators and users fail to take account of significant externalities.

• There is imperfect competition in a transport market e.g. in some regions local buses are a monopoly.

• Roads are a quasi public good i.e. to some extent non-excludable and non-rival.

• Railways are a natural monopoly so a regulated monopoly is the best solution.

Task: What are the special characteristics of transport investment?
The characteristics of transport investment include:
• Transport investment especially in infrastructure is very expensive and measured in £billions;

• Infrastructure has a life of 25+ years ie is long term;

• The costs mainly occur in the early years while the benefits are spread over the life of the project;

• Transport infrastructures also create positive externalities;
• Investment in local transport infrastructure can be an initial stimulus to regional economic development with improved job opportunities and a multiplier effect.

Task: Is road space a pure public good?
A pure public good is non-excludable and non-rival.

Tolls and licences can be used to exclude motorists; once operating at capacity road space becomes rivalry. In short, road space is a quasi public good.

Task: Distinguish between Public Private Partnerships and the Private Funding Initiative
Public Private Partnerships (PPPs) are joint ventures between private sector firms and public sector agencies eg Amery and London Underground.

The Private Funding Initiative (PFI) is an example of PPP where private firms bid for a contract to pay for the construction costs of infrastructure and then rent the finished project back to the public sector.

Task: Is the Private Funding Initiative a success in transport? Justify
No: Some private sector firms are demanding rates of return in excess of 30% for investment in London Underground modernisation.
This implies a pay back period of 3 years with 22 years of ‘super-normal profit’. The ‘abnormal profit’ received by firms could be reinvested in the service.

Yes: “The use of PFI for road procurement has delivered contracts representing real value for money…. These savings are significant and show that private sector efficiencies and the adoption of whole-life costing techniques are not just theory, but a reality.” Source: Highways Agency.

Task: Give examples of fixed, variable and semi fixed costs in transport
Fixed Costs are independent of mileage.
• Car purchase / replacement
• Interest on loans
• Depreciation of vehicle due to age

Variable Costs depend on miles/usage.
• Fuel
• Depreciation from mileage
• Time Cost (opportunity cost)
Semi fixed costs part fixed and part variable eg a firm may employ a pool of drivers who may be idle at some point in the day.
Task: Are load factors important?
Load factor refers to the proportion of total space or seats sold.
• A load factor of 80% means 8 in 10 seats are sold.
• A greater load factor means higher technical efficiency, and lower unit costs.

Task: Can costs and benefits always be expressed in monetary terms?
Externalities are estimated using money as a unit of account. Private costs and benefits are relatively easy to establish by constructing demand and supply schedules.

External costs are estimated using one of two methods:
• ex ante i.e. before the event: what are users willing to pay to avoid an externality?

• ex post i.e. after the event: what are the costs incurred by say an accident.

NB: The Dept of Transport assess environmental, accessibility, and integration impacts qualitatively ie outside a CBA approach.