The subject content of this module focuses on the economic principles and context underlying a range of transport problems and issues. In particular, it considers transport industries in terms of the models of market structure, especially in the context of the contestablility in such markets. Although there is a particular emphasis on the transport situation in the UK, candidates may draw upon the experience of the rest of the EU and rest of the world where this is appropriate to the requirements of the topic. Some knowledge of the recent historical background to transport issues and policies is required in order to appreciate contemporary applications. However, the specification content focuses upon present day transport economics problems and issues.

The use of relevant statistical information should be incorporated into the teaching of this module. Transport Statistics Great Britain (annual), Office for National Statistics, is a particularly useful source. Other data is incorporated in newspaper articles and transport publications as well as material on the World Wide Web. The web site of the Department for Transport, ( is particularly useful.

5.5.1 Transport, Transport Trends and the Economy


Definition of transport, Transport modes and modal characteristics. Transport as a derived demand. Factors affecting the supply of transport services.

Recent trends in transport demand in the UK. Forecasted demand and the economic basis of transport forecasts. The importance of the transport sector in the UK economy.

Candidates should be able to:

• define ‘transport’ in terms of transport operations and infrastructure;
• understand the advantages and disadvantages of the main modes of transport, for passenger and freight transport;
• apply an understanding of these characteristics to appreciate why transport is a derived demand;
• understand the structure of transport operations in the UK, in terms of private and public sector ownership and responsibilities;
• interpret and understand the reasons for recent trends in the demand for and supply of transport in the UK;
• apply economic principles in order to understand how and why transport forecasts are made and used by transport economists;
• handle and interpret data on the economic importance of transport in the UK economy.

5.5.2 Theories of market structure and competitive behaviour in transport markets


The models of perfect competition, monopolistic competition, oligopoly and monopoly. The concept of contestability in markets and comparisons of outcomes in terms of prices, output, profits and efficiency.

Application of these models to the behaviour of firms in transport markets, to include: recent ownership trends; transport as a natural monopoly; transport as a franchised monopoly; deregulation and the principle and impact of contestability in road passenger (bus) and air transport in Europe; the process and impact of rail privatisation, including the role of franchising and direct sale of freight.

Candidates should be able to:

• explain the models of perfect competition, monopolistic competition, oligopoly, monopoly and contestability;
• evaluate the implications of different market structures for resource allocation;
• apply the outcomes of the models of market structures to the actual behaviour of firms in transport markets;
• analyse the natural monopoly argument applied to transport;
• understand what is meant by deregulation and analyse the characteristics of contestable markets;
• evaluate the impact of deregulation in road passenger (bus) and air transport in Europe;
• describe how the transport industry in the UK has been privatised;
• understand how and why the UK’s railways have been privatised and evaluate the impact of this privatisation for passenger and freight services;
• discuss the relationship between efficiency and market structure in transport.

5.5.3 Resource allocation issues in transport


Objectives of transport policy and how to achieve the ‘best’ allocation of resources; the concept of an ‘integrated’ transport policy.
How resources are allocated in transport – role of government and the private sector. New initiatives and opportunities for the private sector in transport projects. The cost structure of the main modes of transport.
Cost-benefit analysis – application in transport decision-making.

Candidates should be able to:

• understand and evaluate the objectives of transport policy;
• analyse why the ‘best’ allocation of resources is not always possible and why this may constitute market failure;
• understand the nature and features of an ‘integrated’ transport policy;
• understand how resources are allocated in the transport sector;
• understand how and why the private sector has funded recent transport projects through initiatives such as the Private Funding Initiative;
• evaluate the contribution of the private sector in transport investment decisions;
• understand and analyse the cost structure of the main modes of transport operations in terms of fixed costs and variable costs;
• understand how and why some costs and benefits can be expressed in monetary terms, whilst others cannot;
• understand how the costs of traffic congestion can be calculated;
• understand and interpret information collected in a transport cost-benefit analysis and apply this knowledge in transport decision-making;
• discuss the uses and limitations of the cost-benefit approach to transport decisionmaking.

5.5.4 Market failure and the role of the government in transport


Negative externalities associated with increased transport use – pollution, noise, accidents, blight, stress, congestion – and how these may be expressed in monetary terms. Transport and the environment: role of regulation and taxation in dealing with negative externalities; the hypothecation of taxation; transport policy and the environment – the contribution of the Royal Commission of Environmental Pollution; the nature and meaning of sustainability in transport; the relevance of sustainability for transport policy and in transport policy strategies for the future.

Traffic congestion as a market failure: policies for combating congestion – role of transport subsidy, public transport development, user charges, fiscal measures and direct control; the nature of road pricing – its advantages and disadvantages; international comparisons of policies for reducing congestion in cities; road pricing in transport policy in the UK and

Candidates should be able to:

• discuss how regulation and taxation are used in transport to reduce negative externalities;
• the meaning and rationale of the hypothecation of taxation;
• evaluate the extent to which transport policy in the UK is sensitive to environmental issues;
• define sustainability and apply this to the transport sector;
• analyse and evaluate the extent to which current and future transport policies are sustainable;
• apply the principle of market failure to the problem of traffic congestion;
• understand the policy options for combating congestion and discuss their respective advantages and disadvantages;
• understand what is meant by user-charging and road pricing and analyse their economic basis;
• evaluate the theoretical and practical arguments for the introduction of user-charging and road pricing schemes;
• compare the experience of the UK with that of other countries.

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