The Routledge Handbook of Transport Economics

Jonathan Cowie, Stephen Ison, Jonathan Cowie, Stephen Ison

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317537953
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

The Routledge Handbook of Transport Economics offers the first state of the art overview of the discipline of transport economics as it stands today, reflective of key research and policy. Transport is an important area of study and one which is problem rich, stimulating a great deal of debate in areas which impact on everyday lives. Much of this focuses on the practicalities of the modern-day phenomenon of mass movement and all of the issues which surround it. The discipline of economics is central to this debate, and consequently the study and application of transport economics has a chief role to play in seeking to address subjects relating to major transport issues. It can be argued that at the very heart of any transport issue or problem lies the underlying economics of the situation – understand that and you alleviate the problem.

Featuring contributions from world-leading scholars and practitioners from across the globe, all of the chapters within this book are written from a practical perspective; theory is applied and developed using real-world examples. The book examines concepts, issues, ideas and practicalities of transport provision in five key topic areas:

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• public transport

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• public transport reform

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• economic development and transport modelling

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• transport and the environment

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• freight transport.

A real strength of the book is in linking theory to practice, and hence the 'economics' that are examined in this text are not the economics of the abstract, but rather the economics of everyday living. Practical and insightful, this volume is an essential reference for any student or researcher working in all areas of transport provision, ranging from planning, appraisal, regulation and freight; and for all practitioners looking to develop their professional knowledge and who are seeking professional accreditation.

1

Introduction

Jonathan Cowie, Stephen Ison

One should hardly have to tell academicians that information is a valuable resource: knowledge is power. And yet this occupies a slum dwelling in the town of economics. Mostly it is ignored.

(Stigler, 1961, p. 213)

1.1 Introduction

Transport is an important area of academic study and one which is problem rich, stimulating a great deal of debate in areas which impact on everyday lives. Such debates, however, have a very real focus on the practicalities of the modern-day phenomena of mass movement and all of the issues associated with it. It is also an area which is developing at a rapid pace, not least given new and innovative developments in technology. The discipline of economics is central to this debate, and consequently the study and application of transport economics has a major role to play in seeking to address subjects relating to major transport issues. Some would even argue that at the very heart of any transport issue/problem, lies the underlying economics of the situation – solve that and you alleviate the problem. In practical terms, this translates into matters surrounding urban and interurban traffic congestion, the public cost of the environmental impact of transport, the structure of transport markets and associated models of transport production/delivery, private versus public ownership and/or control of transport services, and the financing of infrastructure and other significant transport-related projects. In many respects, all of these fit with one interpretation¹ of Carlyle’s often quoted description of economics as ‘the dismal science’, ‘dismal’ in the sense that it deals with the nuts and bolts/realities of daily life, rather than more ‘enlightening’ aspects.

Central to all of this is the economic problem of moving people and freight from one location to another. Transport is seldom demanded for its own sake and by its very nature is a derived demand. This means that both individuals and freight relocate, not for the sake of travelling, but in order to realise their maximum value, whether that be in monetary or non-monetary terms. Transport as such is a key component of any economic ‘system’; the problem, however, is that it is unique in both time and space, which means that it cannot be stored or transferred. This results in the peak/off-peak nature of demand creating significant issues of congestion with the associated environmental degradation.

Congestion in many respects is the classic ‘economic’ problem of scarcity, either caused by too many people attempting to access a set space or too little ‘space’ for the level of people attempting to access it. Contemporary times have seen the introduction of pricing into the sector as part of a hard-option approach to demand management. The role of pricing, however, has a long history in the academic literature stretching back to the work of Dupuit (1844) and Pigou (1920). In addition, there have been key official government reports, most notably the Smeed Report on the Economics of Road Pricing (Ministry of Transport, 1964). The environmental impact of transport, be it locally in terms of health implications or more globally in relation to climate change, is a more recent area of study. Again the role of the price mechanism in terms of dealing with externalities, whether that be through direct taxation or other schemes such as creating a market in emission trading permits, highlights the significant place of transport economics in addressing the issue.

As regards organisation and governance, since the 1970s the public transport sector has been subjected to significant deregulation, most notably in terms of the bus, coach and aviation sectors. Major issues arise out of such reforms, whether it be in dealing with the relative welfare benefits of such a course of action through direct competition or through the underlying principles of contestability (Baumol, 1982). Deregulation has tended to go alongside privatisation, which in the British context has consisted of privatising airline operators, airports, the rail sector, road haulage and bus operators. The planning, provision and financing of infrastructure can also be seen as an important facet of transport economics, in particular in deciding which projects should be progressed and which should not.

With regards to freight and the whole logistics/supply chain management, von Mises (1949), in development of the theorem of consumer sovereignty in Human Action, made a key reference to the efficiency of what today is commonly known as supply chain management and the wider area of logistics. He also stressed the importance of innovative solutions in the delivery of goods and services at the lowest possible cost. The rapidly changing economics of these sectors has led to major reforms and innovations in distribution networks and arguably in far-reaching structural change and more general industrial organisation. These developments have all been market led and not as a result of policy, and have had such a profound impact that, along with higher-level institutional changes brought about by the General Agreement on Tariffs and Trade,² have led to what is more commonly known as ‘globalisation’, a phenomenon that continues to unfold today.

In compiling this collected volume of invited chapters, the editors recognise that there are many texts available on the subject of transport economics, ranging from a selection of introductory texts through to edited collections of intermediate and high-level chapters. All of these have had and continue to have an important role in developing the discipline of economics to the study of transport. The current volume has been compiled to complement these texts with a more practically oriented focus, which in many cases consists of the simple application of economic principles to transport issues. In some respects, therefore, the ‘oddities’ of reality are not assumed away and thus, contrary to the esteemed view of George Stigler given at the start of this chapter, it should hopefully not be ignored and prove to be a valuable resource. This is particularly important given that the economics of transport drives everything in the transport subject area, whether that be patronage levels, subsidy levels, policy development, traffic congestion, freight modal splits, public transport reform or ecological degradation.

1.2 Book sections and key topic areas

In putting together this handbook, the editors have identified five key subject areas to be examined:

(1) public transport;

(2) public transport reform;

(3) forecasting, public choice and transport modelling;

(4) transport and the environment;

(5) freight transport.

Public transport comprises the first two parts of the book and hence the first two of the ‘five’ key areas into which the book is divided. Mass movement is a key symptom of modern life, and the only way this can be achieved ‘efficiently’, whether that refers to economic or any other kind of efficiency, is through mass public transit. This therefore is a key area of study. In contemporary times, however, public transport has been under reform, in particular with regard to the extent provision and finance is state provided or privately provided, or indeed some balance between the two. As stated later, this is probably the second biggest issue confronting the application of economics to transport, and therefore is the second key area of study. Part III is a combination of a number of issues, ranging from economic development, public choice and transport modelling. In many respects this is the more technically orientated part of the book and examines how economic principles are directly applied to transport situations, and furthermore how these principles have crossed over into other aspects of transport research. Part IV relates to transport and the environment, and the impact of mass movement on the natural resources and natural habitat is one that has been a growing area of concern since the 1980s and one that will continue to be high on the political agenda, hence this is the fourth key area. Finally, Part V concentrates on freight transport. Much academic research surrounds passenger transport, however, comparatively little exists on freight. In many respects the reason for this is that there is considerably less policy, i.e. state intervention, in these modes, the assumption being that these can be left to the market to provide. Consequently, its importance is understated. Nevertheless, freight drives the economy and arguably wider society. This text therefore presents the opportunity to give the study of freight transport its rightful place as a fifth key area.

Part I: Public transport

One of the major issues in transport economics, if not in the wider area of the study of transport, is the organisation of public transport services so that they deliver high-quality services and represent value for money to the public purse. Given the importance of this subject, Part I covers this topic and begins with a look at mainline railways. The rail industry, however, and the economics of how it all ‘works’, is a vast area and is a sector which features a high number of key economic issues, such as private-versus public-sector provision, regulation, high levels of subsidy, questions over productive inefficiencies and value for (public) money, competition/contestability and a seemingly endless stream of reforms in search of some kind of ‘solution’ to these issues. Simon Blainey’s chapter gives an important insight into a number of these underlying areas, particularly with regard to reform and the involvement of the private sector. As Simon highlights, introducing the private sector into the industry is a far from straightforward process. In contrast to the bus industry, the process, in principle, is very simple: rather than have buses owned and operated by a public-sector body, buses are owned and operated by a private-sector company. The whole issue of contracting and aligning the private-sector profit motive with public-sector aims is a whole further topic (see Chapter 7), however, the principle is relatively straightforward. With railways, introducing the private sector involves far more structural change and is more complex than a simple change of ownership. Simon’s chapter outlines the various structural forms this can take, and the advantages and disadvantages of each. What Simon tends to suggest is that the rail industry, and the structure associated with delivering productively efficient and user-friendly services, is not a case of ‘one hat fits all’, and therefore in part explains why rail reforms have tended to be problematic and, from an academic perspective, a very interesting area to study.

As highlighted, buses, in terms of reform, should be more straightforward, however, it could be argued that although bus economics has long been studied, bus economics has equally long been misunderstood, certainly in light of the British experience with bus deregulation. Peter White’s chapter attempts to go some way to addressing this lack of knowledge, and gives a good insight into the large influence that different operational conditions and practical considerations have upon operating costs. These are often overlooked in theoretical economics and in any evaluation of the impact of reforms, but they are key to understanding the underlying economic issues. A second consideration is the extent to which the market can regulate competition in order that it results in an economically efficient market outcome, or certainly something close to it. Peter uses examples from the British experience with the deregulated market, the London regulated market and the contracted socially necessary market, and shows that while there appears to be strong evidence of only limited scale economies in bus operation, large companies nevertheless tend to dominate in all three of these markets. Furthermore, profit levels appear to be well above what would be considered ‘normal’. This perhaps suggests that there are still issues within bus economics that remain little understood and hence areas for further research, particularly the extent to which there exist economies in carriage (as opposed to economies in operation) and the extent to which network effects offer a competitive advantage.

Vital in the operation of any market, whether that be deregulated, regulated or subsidised, is the role of price. In most markets, price represents how much the consumer pays for the good and the amount the producer receives for it. In mainstream economic theory, the price of course represents far more than that, and ultimately represents market efficiency. In other words, the ‘right’ price means that we end up with the ‘right’ amount of production of a particular good or service, consumed by the ‘right’ people (i.e. those willing to pay the market price). This in turn results in the benefits from production and consumption being shared equitably between utility-maximising consumers and producers. Within public transport services the issue is clouded further by the (positive) externalities associated with the modes and hence the tendency for it to be heavily publicly funded. The price then also determines the extent to which the service is paid for by the government and the extent to which it is paid for by the user. Corinne Mulley and Marco Batarce’s chapter on the pricing of public transport provides an excellent insight into the factors and influences that go into the pricing of public transport services. What they successfully do is strike a balance between theory and practicalities, and in doing so give a real insight into what goes into the pricing decisions surrounding public transport services. What we get is both a view of what public transport ‘should’ be doing with regard to the pricing of services, and how this is transmitted to a practical context. Highlighted particularly well is the fact that, with the one notable exception of a deregulated market, there are many factors that sit behind the pricing of public transport services, all of which are directly related to the more general economics of transport services. What Corinne and Marco outline is that there is no general approach to the pricing of transport services, with the diversity and range of influences this will depend upon policy objectives that are found under different situations and how this interacts with the underlying cost of provision.

A second component in the operation of the market is the provision of public transport information, and this has become a major topic in itself, both from an operational perspective and an academic one. In terms of basic economics the provision of perfect information forms one of the important assumptions in markets such as perfect competition. As with the provision of any service the flow of information is all important and public transport is no exception. The user needs the appropriate information at the appropriate time in order to make an informed choice as to whether to travel or not, and in the case of the former, what mode should be used. John Nelson’s chapter explores the importance of market information to consumers and assesses the role of high-quality information as a key enabler of successful transport service provision. A recurring theme throughout the chapter is the critical role of smart technology. The simple question as to why the user/consumer of local public transport requires specific information is examined along with the various approaches which are taken in terms of providing that information, whether it be through the use of traditional media or the role played by smart technology. With respect to information flows, then, cost and capacity are important, while information availability, such as real-time passenger information, and accuracy tend to be impacted by levels of disruption. While this is the case, social media can aid in terms of mitigating the impact of disruption. As such, over time the provision of timely, accurate and personalised real-time information has become the priority of those charged with the development of journey planners and other channels for the delivery of information. Mobile applications have already eclipsed the limited deployment opportunities of real-time displays at bus stops and (traditional) journey planners must also be available for use on mobile devices.

The use of technology leads into Peter Forsyth’s chapter on air passenger traffic. The chapter outlines the different types and forms of passenger air operator, before examining the airline cost function and the main factors of production used in the production of passenger air services. The chapter goes on to examine the key issues impacting on the use of these factors, such as the unionisation and internationalisation of labour and returns to scale, or more exactly, returns to density associated with capital equipment. Interestingly, Peter highlights that price is only used on rare occasions to manage or apportion the use of runways, which in many areas remain the constraining factor. The chapter then highlights that air fares have been steadily falling in real terms. This is put down to two main reasons. Firstly, the improvement in the efficiency of aircraft, and secondly, the use of information technology and the internet. Interestingly, Peter does not highlight competition or wider deregulation of the sector as a contributory factor. Nevertheless, what this leads to is an industry that at the general level conforms with anti-competitive market structures, but one characterised by relatively low levels of profitability. This of course is contradictory to economic theory and provides an interesting paradox and one that Peter highlights as an ongoing puzzle and as such a real gap in the research.

Part II: Public transport reform

Reform in the provision of transport services is not new. Richard Beeching was given the task in 1963 of making the then state-owned British Railways break even by 1980, which led to a high number of controversial line closures. Come the 1980s, rising subsidy levels and macro-economic pressures on government finances led many governments to seek other solutions to obtain better value for the levels of public finance being provided. In most cases this has involved introducing the private sector in one form or another in order to resolve many of these issues.

The most common approach adopted is the privately owned/publicly regulated market, which generally takes the form of services run by private-sector companies under contract to a public authority. Much research surrounds the general use of contracts in the procurement and provision of public transport services by such authorities. Most of this focuses on the practicalities of the operation of these contracts and the types of outcome (both desirable and undesirable) that result. David Hensher’s chapter outlines the key components of principal-agent theory and by doing so clearly identifies the key issues that lie behind such contracts and in very clear and straightforward terms illustrates why such contracts can be difficult to draft, implement and ‘get right’. The chapter also illustrates why such practices are not generalisable, hence what may ‘work’ in one context may not work in another. What tends to be overlooked in terms of economics in general and the provision of transport services in particular, is that at the end of the day it is about people (both in the consumer and producer roles), and whilst there may be instances where we can use theory to hypothesise how the ‘average’ person may behave, there remain situations where we cannot. In other words, we transgress between positivistic and social constructivist worlds. Both are relevant to the study of transport economics, and David’s chapter illustrates very clearly how theory can be used to give a better understanding of the key issues in both instances. He highlights that one of the problems with operator comparisons are that qualitative differences tend to be ignored, hence the importance of normalisation or delimitation when benchmarking public transport operations. David’s chapter also illustrates very well that the study of transport economics does not, or certainly should not, exist in an academic vacuum, but that there is much to be learned from studying other areas and other situations outside of the transport field. It comes therefore as a timely reminder that transport economics is a sub-discipline of economics, in much the same vein as agricultural economics, labour economics, environmental economics, industrial economics and so on.

Whilst public transport reform has tended to switch from public to private ownership, as highlighted above, in most sectors control has remained a public-sector function. The switch from public ownership therefore has introduced the need for economic regulation. This is a vast subject area, and one closely associated with the extensive work of the above quoted George Stigler. Within the transport field, public-sector bodies to a greater or lesser extent set and control the basic tools of economic competition, namely the price, frequency, market entry and in some cases even the quality (i.e. those above the legal minimum) of the service provided. Chris Nash, Valerio Benedetto and Andrew Smith detail rail regulation and highlight that while the trend over the last 40 years in the transport sector has been towards dere...