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2013 EDITION
Q&A
Richard Young
A2 Transport Economics
Contents
Introduction to Transport.................................. 2
Transport forecasts.......................................... 6
Hypothecation ................................................. 24
Market Structures.................................................. 7
Subsidies ............................................................ 27
Costs ....................................................................... 7
Regulation ......................................................... 28
Sustainability ................................................... 30
Barriers to entry.............................................. 10
Rail Industry..................................................... 32
Transport policies............................................... 36
Monopoly ........................................................... 13
Privatisation...................................................... 20
Richard Young All rights reserved. First edition 2011. This edition 2013. The right of Richard
Young to be identified as the author of this Work has been asserted in accordance with the
Copyright, Designs and Patents Act 1988.
Introduction to Transport
Transport and transport modes
Define transport. Transport refers to the movement of people and goods between destinations.
List the main type of transport. Passenger transport is the movement of people from one place to
another. Freight transport is the movement of goods from one place to another.
Define infrastructure. The stock of capital used to support the economic system
What is transport infrastructure? Transport infrastructure is capital items such as road and rail
networks, airports that facilitate transport operations.
What are transport operations? Transport operations are decisions about the type of transport
mode to use (demand) or provide (supply). Demand side decisions are made by consumers and firms
eg what journey to make, by what mode, and at what time. Supply side decisions are mainly made by
private sector firms eg what transport services to offer over what routes and what time and price.
Define mode of transport. A mode of transport is a method of transferring passengers and freight
from one destination to another
Summarise the main characteristics of each mode of passenger transport.
Mode
Impacts
Road
(car)
Bus
Rail
Air
Disadvantage
Road
Rail
Air
Sea
slow
What is loading? Loading or load factor is the percentage. Eg a loading factor of 80% means 20% of
seats or space is unused in a journey. High loading indicates means few empty seats.
Define private transport. Private transport is when people use their own vehicles to travel.
What is public transport? Public transport involves the mass movement of people at one time usually by bus or train and using a scheduled service on a fixed route.
Variable
With respect to
Short run
Long run
Petrol consumption
Petrol price
-0.3
-0.6 to 0.8
Car traffic
Petrol price
-0.15
-0.3
Relationship between
products A and B
Zero
Independent goods
Apart from private sector schemes such as M6 toll road, virtually all roads are funded by
government. The Highways Agency coordinates strategic motorway and trunk roads eg A40.
Investment decisions about rail track is made by Network Rail
Investment in other transport infrastructure used by other modes is in the private sector eg BAA
invests in airports such as Heathrow Terminal 5.
Why expand road networks? Depending on where they are built, new or expanded highways
Increases the supply and lowers the price of road use which increases consumer surplus
may reduce congestion and associated negative externalities so increasing allocative efficiency
creates significant external benefits eg regional multiplier effects and lower transport costs for
local businesses using the new infrastructure
Transport forecasts
What is a forecast? A forecast is the prediction of expected future conditions
How are forecasts used in transport economics? Analysts estimate of the likely future
growth for a mode of transport eg expected number of journeys
value of costs and benefits as part of investment appraisal eg a cost benefit analysis
How is transport forecasts conducted? Analysts
identify factors affecting demand eg price, GDP, income, price of substitutes and complements
assess the relationship between variables eg how population changes affect demand
predict the strength of relationships between variables eg income and demand (YED)
make assumptions about the future value of variables eg fuel prices, GDP and population levels
predict central, high and low trends for future levels of demand
Identify problems in making transport forecasts.
Value judgements must be made as to which factors to include or exclude in the forecast and
the weighting to give each factor
Forecasts require estimates of future levels of GDP and populations size which are uncertain
Data collection may be difficult or costly
Inaccurate data may be collected eg by using biased surveys
unforeseen events may occur eg a recession
How is elasticity data used in forecasts? Elasticity data helps predict future levels of demand. Eg if:
The long run price elasticity of demand for car traffic with respect to petrol price is -0.3, a
projected 10% increase in fuel prices leads to a 3% increase in traffic levels
The long run income elasticity of demand for car traffic is between +1.1 and +1.8 then a projected
10% increase in income leads to a 11% to 18% increase in traffic levels
How is transport forecasts used? The economic problem is how to allocate scarce resources
between alternative uses. By forecasting likely future demand resources can be allocated to networks
experiencing the most congestion. This means forecasts result in better use made of scarce resources.
Explain the term predict and build. Traffic levels are forecast and new capacity is added to match
projected future passenger and freight levels to avoid future congestion.
Are forecasts always accurate? Forecasts give a broad indication of behaviour based on past trends
and best understanding of future behaviour and events but are bound to be uncertain. Eg
Assumptions about future fuel prices, GDP income and population may prove inaccurate
New roads can generate unexpected additional usage and have impacts on other modes.
How does time affect forecasts? Factors affecting past behaviour are unlikely to change in the
immediate future. Forecasts become increasingly unreliable overtime as predictions are more likely to
be affected by unforeseen events and changes in established patterns or consumer behaviour..
What are the consequences of inaccurate forecasts? Government and firms use data to make
resource decisions. Inaccurate forecasts lead them to make different decisions than if they had
accurate information resulting in a misallocation of resources.
How are forecasts used in cost benefit analysis? See the section on CBA
Transport forecasts |
Market Structures
Revenue and profit
What is revenue? Revenue is the amount a firm receives from the sale of its output.
Define total revenue. The total amount a firm receives from selling a given level of output.
How is total revenue calculated? Total revenue (TR) is found by multiplying price (P) by the number
of units sold (Q). TR = P x Q
What is average revenue? The amount a firm receives per unit sold - another name for price.
How is average revenue calculated? Average revenue (AR) is found by dividing total revenue (TR)
by the amount sold (Q). AR = TR/Q ie P
What is marginal revenue? The amount received from selling one extra unit of a product
How is marginal revenue calculated? Marginal revenue (MR) is found by dividing the change in
total revenue (TR) by the change in output (Q). MR= TR/ Q
What is profit? Economists talk about two types of profit:
Normal profit is the minimum amount that must be received to keep a firm in its current
industry. In economics, normal profit is a cost of production. This means all costs curves
include an element of payment to the entrepreneur required for organising production.
Supernormal profit is any extra profit made in excess of normal profit. Firms earn supernormal
profits () when total revenue (TR) exceeds total cost (TC). = TR TC
Link normal profit and costs curves. All costs curves (eg AC and MC curves) include an element of
normal profit. Normal profit is treated as a cost ie a reward to entrepreneurs like wages for labour.
Are there benefits from supernormal profits? Supernormal profits are a source of internal finance
for R&D which, if successful, leads to new or improved products or processes and dynamic efficiencies.
Costs
Define total costs. Total Costs (TC) refer to the amount of expenses incurred in a transport operation
and is made up of fixed costs (FC) and variable costs (VC). TC = FC + VC
Explain variable costs. Variable or direct costs (VC) are vehicle operating costs and depend on the
level of usage. Travelling increases variable costs which include fuel. VC = TC FC.
Give examples of variable costs for transport. Fuel, travel time and accident risk are variable
transport costs because they increase directly with vehicle mileage.
What are fixed costs? Fixed costs (FC) are totally independent of the level of use of a vehicle and have
to be paid out even transport operations cease. Fixed costs include car insurance and vehicle excise
duty (tax disc). FC = TC VC. Also called overheads or indirect costs
Give examples of fixed costs in transport. Age depreciation and insurance are fixed transport costs
examples because vehicle owners pay the same amount, regardless of vehicle mileage.
Explain average costs. Average cost (AC) or unit cost is the cost of producing one item and is found
by dividing total costs (TC) by total output (Q). AC = TC/Q.
Explain marginal costs. Marginal cost (MC) is the cost of producing one extra unit and is found by
dividing the change in () total costs (TC) by the change in output (Q). MC = TC/Q
How is output levels measured in transport? For passenger quantity can be measured by number of
passenger kilometres or journeys. Freight output is measured in tonne kilometres
Economies of scale
Define the long run. The time period when firms can adjust all factors used in production, ie both
labour and capital, and enter or leave an industry
Define economies of scale. Economies of scale (EoS) are the benefits, in the form of lower unit costs,
from increasing the size of operation. There are many types of EoS eg technical and managerial.
How do economies of scale benefit economic agents? Falling long run average costs (LAC)
represent an improvement in productive efficiency and may be passed onto consumers in the form of
lower prices thereby improving consumer welfare.
State the two categories of economies of scale. Internal EoS lowers a firms unit costs because the
firm is growing. External EoS lowers a firms unit costs, because the industry is growing
What are internal economies of scale? Internal EoS arise from the long term growth of the firm.
Explain technical economies of scale. Technical EoS arises from productivity gains in the production
process itself. Eg as airlines grow and invest in bigger airplanes they find capacity increases by a larger
percentage than operating costs so LAC fall the law of increased dimensions. The fixed cost of an IT
system can be spread over a larger level of output reducing LAC as the firm grows in size.
Explain managerial economies. Managerial EOS arises when firms employ specialist accountants, HR
managers, etc. Employing specialist managers increases productivity and so reducing LAC
Explain purchasing economies of scale. Purchasing EOS arise when firms gain discounts from bulk
buying thereby reducing LAC eg airlines can negotiate discounts for buying dozens of planes at once.
What is a long run average cost curve? A long run
average cost curve (LAC) shows the firms minimum
unit cost of producing each level of output for each
scale of operation.
Each scale (size) of operation has its own short run
average cost curve eg SAC1. Using more capital and
labour shifts the SAC curve outwards and downwards
if the firm experiences internal economies of scale.
The LAC curve shift outwards and upwards if firms
experience diseconomies of scale from growth.
What is minimum efficient scale? (MES) is the
lowest level of output needed to produce at lowest
unit cost. The firm has grown to the point where there
are no internal EoS left to exploit.
Define diseconomies of scale diseconomies of scale are the disadvantages to the firm, in the form of
higher unit costs, from increasing their size of operation
Why can internal diseconomies of scale occur? Internal diseconomies can arise from problems with
Communication: as firms grow and take on more staff communication becomes problematic eg
staff may misunderstand a task resulting in productivity falls and LAC increases
Control: as firms grow it becomes more difficult to coordinate the work of employees,
efficiently. Extra management costs are incurred with increase LAC
Workers in large firms may feel uninvolved, experience alienation, and so lose motivation. Lost
productivity results in in higher LAC
Explain external economies of scale. External EoS is the benefit, in the form of lower unit costs, from
an increase in the size of the industry. External EoS are shared by all firms in the industry.
Give examples of external economies of scale. When firms in the same industry locate close
together, transport costs fall. A pool of skilled labour reduces recruitment costs.
Economies of scale |
As the industry grows, government may improve local roads which cut the cost of delivering supplies
therefore lowering LAC.
Give examples of external economies of scale in
transport. Support services such as catering, couriers,
and airplane servicing companies tend to locate near
airports lowering the LAC for all firms in the industry
eg from LAC1 to LAC2 in the diagram.
Illustrate external economies of scale. Growth of the
entire industry reduces the LAC of all firms in the
industry. Eg the LAC for firm Y in the diagram opposite
shifts downwards at all levels of output. This means the
LAC of making Q1 falls from A to B
Distinguish between limit and predatory pricing. In limit pricing monopolists set a price to earn
normal profits and so deter (limit) potential entrants. Predatory pricing occurs after the arrival of a
new firm. The incumbent sets a low price trying to force the exit of competitors
Explain the term stakeholders. Stakeholders are groups who have an interest in the activity of a firm
eg shareholders, managers, staff, customers, government and local communities.
Define stakeholder conflict. When different stakeholders have incompatible objectives.
How does the agent-principal problem affect firms? Ownership and management are separate in
companies. Shareholders (the principal) elect directors (the agent) to act on their behalf and to
maximise shareholder value. Managers may instead take decisions that meet their own objectives eg
hiring extra staff to reduce manager workloads. The result is organisational slack and x-inefficiency.
How can the agent-principal problem be resolved? By linking managers pay to share prices eg by
offering an option to buy shares in the company at some point in the future at the current price
What is satisficing? When firms decide to meet the minimum requirements of several stakeholder
objectives, rather than say owners objective of profit maximisation
Who decides objectives? The aim of a business is decided by the dominant stakeholder(s) taking into
account legal constraints such as regulations and competition laws. In companies there is the potential
agent-principal problem. Directors may opt to avoid maximising any one objective and satisfice.
Barriers to entry
Define barriers to entry? Obstacles preventing or restricting firms entering a market
What is an incumbent firm? An incumbent is a business already operating in a market.
What is an entrant? An entrant is a firm seeking to join a market and compete with incumbents
What is the significance of barriers to entry? They limit the ability of new firms to join an industry
and so restrict competition allowing incumbents to sustain any supernormal profits in the long run
List barriers to entry preventing restricting firms entering a market
Legal: incumbents may have a legal monopoly over supply, or government regulations may
require firms to meet health and safety regulations before granting an operating licence
High start-up costs of hiring new staff, buying/leasing capital assets (eg planes and IT systems)
and marketing to establish a brand image act as a deterrent to entrants
Incumbents generally enjoy economies of scale unavailable to new entrants ie lower unit costs.
Incumbents can use this cost advantage for limit pricing and set a price which covers their own
unit costs but which entrants find hard to match and still make a profit.
Define limit pricing. When firms set a low price to discourage ie limit rivals entering into a market
Define barriers to exit? Obstacles that restrict existing firms from leaving a market
Define sunk costs. Costs that cannot be recovered if a firm leaves an industry
List barriers to exit preventing or restricting firms leaving a market
Unrecoverable sunk costs when exiting an industry. These include marketing costs incurred
creating a brand image, and any losses from reselling capital items eg planes and IT systems
Penalty clauses in contracts: eg payments needed to quit a franchise agreement to supply rail
services, or to break an office lease. Staff are entitled to redundancy payments
Can firms recover any costs on exiting an industry? Some costs eg marketing are irretrievable.
Equipment can often be sold for an alternative use eg train operators who lose their franchise can
recover some costs by selling eg IT systems to new entrants
How do barriers to exit affect competition? Potential entrants are deterred if barriers to exit are
high. Profits may not be sufficiently high to justify the risks associated with entering new markets.
10
Barriers to entry |
Market structure
Define an industry. An industry is made up of all those firms producing the same product
What is a market? A market is the place where buyers and sellers meet to exchange a product.
Markets require consumers (buyers) producers or firms (sellers) and products to trade.
What is a sub market? Transport market can be broken down into sub markets eg the market for air
travel can be domestic or international, short or long haul, business, etc
What is meant by market structure? Market structure is the characteristics of a market eg number
size and strength of firms and buyers and barriers to entry and exit
State the main criteria used to distinguish between different market structures:
the number and size of producers and how differentiated each firms output is
the degree of competition between firms and whether or not firms act independently
barriers to entry and exit and so firms ability to earn long run supernormal profits
Characteristic
Perfect
competition
Monopolistic
competition
Oligopoly
Monopoly
many small
one large
Product type
identical
differentiated
identical or differentiated
differentiated
normal
normal
supernormal
supernormal
Barriers to entry
none
low
high
very high
Concentration ratio
very low
low
high
very high
Interdependence
none
none
significant
n/a
Concentration ratios
Define market share. The proportion of total market sales held by a firm expressed as a percentage
Define concentration ratios. Concentration ratios measure the total market share held by the n
largest firms in the industry eg the top 4. Concentration ratios range from 0 to 100 %.
Give an example of a concentration ratio. If a four firm concentration ratio is 80 then 80 per cent of
industry output is produced by the four largest firms. Sometimes shown as 4:80
Link concentration ratios with market structure. Low concentration ratios 50% or less indicates
monopolistic competition; ratios in excess of 80% indicate oligopoly. Monopolies have a ratio of 100%
What is market power? Market power is the ability of the firm to influence market price. The extent
of market power is indicated by the concentration ratio
What are the limitations of concentration ratios? Concentration ratios do not distinguish between
the relative sizes of the largest firms eg if the market share of the four largest firms is:
Firm A: 20%, Firm B: 20%, Firm C: 20%, Firm D: 20%. Concentration ratio: 4:80
Firm A: 10%, Firm B: 10%, Firm C: 10%, Firm D: 50%. Concentration ratio: 4:80
Concentration ratios require an agreed definition of the market so that market share can be calculated
this can be problematic. Concentration ratios are meaningless if a market is not accurately defined
What does an increase in the concentration ratio imply? Higher concentration rations means an
increase in the market share of the largest firms in the industry. Economic theory suggests this may
result in less competition, depending on the number and size of firms remaining in the industry.
How does the government define a monopoly? UK Competition law presumes firms with a 25% or
more market share have the market power to act like monopolists. Firms with a 40% plus market
share are defined as dominant monopolists
| Market structure
11
Competitive markets
What is competition? Competition is when rival firms contend for customers
What is a competitive market? A market made up of many firms each contending for customers.
Use a graph to show equilibrium in a perfectly competitive market
Define perfect competition. Perfect competition is a market structure with no barriers to entry
where many firms produce identical products
Can competitive firms earn supernormal profits? Competitive firms can earn supernormal profits
only in the short run. In the long run, supernormal profits attract competition. Zero barriers to entry
allow new entrants to increase supply. Price falls back to a level where normal profits are restored.
How does competition encourage productive efficiency? Productively inefficient firms have higher
unit costs than their rivals. Unless they make better use of their resources and reduce unit costs, their
lack of price competitiveness means they lose market sales and are forced out of the industry.
Is competition allocatively efficient? The interaction of supply and demand in competitive free
markets results in an equilibrium price and output where P=MC, the condition for allocative efficiency.
Monopolistic competition
What is monopolistic competition? It is a market structure with a large number of relatively small
firms each producing slightly different products. The industry has a low concentration ratio.
Give examples of monopolistically competitive
transport markets. Local taxi services have few barriers to
entry and are highly competitive.
Why is the monopolistically competitive firms demand
curve downward sloping? Product differentiation means
each firm has its own demand curve which is downward
sloping because firms must reduce price to increase
quantity demanded. The large number of close substitutes
means demand is highly price elastic: a small price rise
results in a proportionately much larger fall in quantity
demanded
Assess barriers to entry and exit in monopolistic
competition. Low start-up costs mean barriers to entry are low which means firms can enter the
market easily. Sunk costs such as advertising are low so barriers to exit are minimal which encourages
entry as firms know they can recoup most costs on exit.
12
Competitive markets |
Do monopolistically competitive firms have market power? The large number of firms in the
market means firms face intense competition and so have limited market power.
Can monopolistically competitive firms earn supernormal profits? Monopolistically competitive
firms earning supernormal profit attract competition. Low barriers to entry make it easy for new
entrants to join the industry causing incumbents to lose sales to new rivals. Incumbents demand
curve shifts to left reducing supernormal profits until they are eliminated. Supernormal profits attract
new entrants. This means supernormal profits can only be earned in the short run.
Are monopolistically competitive firms allocatively
efficient? Profit maximising firms in monopolistically
competitive set output where MC=MR. Price exceeds
marginal cost causing allocative inefficiency. The area
of deadweight loss is JKL made up of lost consumer
and producer surplus.
Are monopolistically competitive firms
productively efficient? Productive efficiency is
achieved where firms are producing at minimum unit
cost. Profit maximising monopolistically competitive
firms produce at an output level above lowest average
and so are productively inefficient.
Monopoly
Define a monopoly. A pure monopoly is a single seller of a product in a given market.
How can monopolists exclude competition? Monopolies exist as a result of barriers to entry
Illustrate monopolists earning supernormal
profits. Assume profit maximisation. The intersection
of MC with MR gives the profit maximising level of
output of Q1. Consumers are willing to pay P1 for Q1.
Unit costs are only P2 so the firm is making an
abnormal profit of (P1-P2) x Q1
In competitive markets supernormal profits attract
new firms and the resultant increase in supply lowers
price until normal profits are earned. However the
existence of barriers to entry allows the monopolist to
continue earning supernormal profits in the long run
Use a graph to compare priced and output in
monopoly and competitive markets. Assume the
MC curve is also the supply curve for the industry. In a
competitive markets price is set by the intersection of
the supply and demand curve. Price is PC and output is
QC. Note P=MC ie allocative efficiency is achieved.
A profit maximising monopolist use their market
power to set output at QM where MC = MR. Price is
higher and output is lower in monopoly compared
with a more competitive market
How can market dominance result in market
failure? Profit maximising monopolies are allocatively
and productively inefficient. Allocative efficiency
occurs at QC where P=MC. Monopolies set output at QM where MC=MR.. Market failure from over
production of QC-QM results in allocative inefficiency. A lack of competition means monopolists have
few incentives to minimise AC to remain price competitive and so can be productively inefficient.
How can diseconomies of scale affect monopolies? Monopolists may operate on scale that results in
lost staff motivation and management coordination and communication issues. LAC rise with output.
| Monopoly
13
Identify factors that identify the extent of market failure from monopoly. Factors include
the level of contestability and threat of competition rather than the size and number of incumbents
the firms objective eg a nationalised industry can set output where P=MC to maximise allocative
efficiency rather than where MC=MR to maximise profit
the extent to which monopolies are regulated and can set price eg the state restricts rail fare rises
Price Discrimination
What is price discrimination? A firm sell the same product at different prices in different sub
markets, even though costs are identical
List the conditions needed for price discrimination. Price discrimination requires:
Give examples of price discrimination. Train operators charge peak time users a higher fare than off
peak users for the same seat on a given journey. Airlines sell discounted tickets to students
How do monopolists benefit from price discrimination? Assume constant MC. Firms can increase
profits by breaking down a whole market into two submarkets and charging different prices in each.
Output is set in each submarket where MC=MR. Price is higher in peak travel markets because demand
is price inelastic. Price is lower in off peak market because demand is price elastic.
Single pricing generates P1-AC x Q1 supernormal profits less than the amount of profit from price
discrimination = (P2-AC) x Q2 in the peak market plus (P3-AC) x Q3 in the off peak market
Outline arguments for price discrimination. Price discrimination
is a method for reducing demand at peak time and so avoiding overcrowding on trains, etc
Output is higher than with single pricing.
Some consumers pay lower prices than with single pricing, increasing their consumer surplus
The firm may use higher profits to fund investment in improved planes, trains, etc or in R&D
leading to potential dynamic efficiencies in the long run
Outline arguments against price discrimination. Price discrimination means
Some consumers pay higher prices than with single pricing, decreasing their consumer surplus
Monopolists increase prices in markets where demand is inelastic, extracting consumer
surplus from buyers and increasing their profits, so consumer welfare falls
14
Price Discrimination |
Natural monopoly
What is a natural monopoly? A natural monopoly occurs when economies of scale are so substantial
that a single firm can produce output at lower unit cost than two or more firms. Eg Network Rail.
Why are some industries a natural monopoly? In capital intensive industries, fixed costs form an
overwhelming proportion of total costs. Significant economies of scale mean long run average costs
(LAC) falls continuously at all levels of output likely to be demanded.
What are the implications of a natural monopoly? As one firm can supply the entire market at a
lower unit cost than two or more firms, productive efficiency is increased by monopoly provision.
Introducing competition leads to lost economies of scale, hence higher unit costs and lower productive
efficiency. Incumbents have an overwhelming cost advantage creating a major barrier to entry.
Use a diagram to show the cost and revenue
curves facing a natural monopoly. A natural
monopoly is a capital intensive industry where very
large fixed costs create significant economies of scale.
This means LAC continue to fall as the scale of
production increases because fixed costs are spread
over higher and higher levels of output.
Why is it inefficient to have more than one
supplier in a natural monopoly? Multiple suppliers
cannot access the economies of scale enjoyed by a
monopolist. Competition results in higher unit costs
Illustrate equilibrium in a natural monopoly
industry. A profit maximising monopolist sets output
where MC=MR ie at Q1. (P1-P2) x Q1 supernormal
profit is made
Comment on economic efficiency in natural
monopoly. As one firm can supply the entire market
at a lower unit cost than two or more firms,
productive efficiency requires monopoly provision.
Allocative efficiency occurs at Q2 where P=MC. Profit
maximising output is at Q1, resulting in market failure
from under production.
Use a diagram to show arguments for natural
monopoly subsides. Allocative efficiency occurs
where LMC = P ie output level Q2 and price P3.
However, marginal cost pricing leads to a loss = (P4P3) x Q2. Only a subsidy will persuade a profit
maximising monopolists to provide the socially
efficient level of output, Q2.
How can the state prevent monopolies abusing
their market power? Options include:
| Natural monopoly
15
Oligopoly
Define oligopoly. A market structure dominated by a few large firms
Describe the characteristics of an oligopolistic market. A few large interdependent firms dominate
a market characterised by high barriers to entry. Prices are rigid and incumbents use non-price
competition to try to gain market share.
Why are there high barriers to entry in oligopolistic markets? Incumbents enjoy economies of
scale unavailable to new entrants whose higher unit costs mean they cannot compete on price. High
sunk costs also deter competition so that the industry remains dominated by a few large firms
How is the market power of oligopolists measured? Oligopoly industries have a high concentration
ratio (80%+). This means a few large firms account for the majority of industry output.
Can oligopolists earn long run supernormal profits? Oligopoly industries have high barriers to
entry which restrict the ability of new firms to join and so compete away supernormal profits
What is interdependence? Firms consider the likely response of their rivals to eg price changes
Give an example of interdependent oligopolists acting interpedently. If an oligopolist cuts the
price of its products, rival B is likely to react by cutting its own prices to maintain market share.
Why are oligopolists interdependent? Oligopolists are aware that decisions about pricing,
promotion, R&D, etc are likely to trigger a reaction from rivals. The actions of one firm influence, and
are influenced by, the decisions of competitors. This means oligopoly behaviour is reactive. Firms
factor in the likely responses of competitors, eg a potential price war, when setting price or output.
Use the kinked demand curve to illustrate
interdependent oligopolist behaviour. Assume
the initial market price is P1. If an oligopoly
increases price above P1, rival firms do not follow.
Consumers switch to substitutes. This means the
firms demand curve is price elastic above point B.
If rival firms match, or better any price cut below P1
demand is unresponsive making the firms demand
curve price inelastic below point B. The firms
demand curve becomes ABC. The kinked demand
curve creates a discontinuity (gap) in the marginal
revenue curve between R and C.
Why are prices usually rigid in oligopoly?
Oligopolists are interdependent: the behaviour of one firm will influence and be influenced by - the
behaviour of its rivals. In the kinked demand curve model prices are rigid because price cuts are
usually matched by competitors and rivals generally fail to match any price rise made by the firm
causing lost sales and market share.
How do oligopolists compete if not on price? Non-price competition is a feature of oligopoly.
Oligopolies compete on quality and customer service ie product differentiation
What is collusion? Collusion occurs when rival producers decide to act together rather than compete.
Collusion is illegal. However tacit collusion may occur where there is an unspoken agreement to avoid
competitive behaviour eg all firms match the price set by the market leader
Give an example of collusion. In 2007 some airlines colluded and all set high fuel surcharges
Define a cartel. A cartel is a group set up by rival firms to take common action eg agree prices, market
share or exchange information on costs
Give examples of formal and informal collusion? A cartel is an example of formal collusion and is
illegal in most countries including the UK. Price leadership is an example of informal collusion where,
without official agreement, rivals charge the same price as that set by the market leader and so avoid
price competition. Collusion restricts competition.
16
Oligopoly |
Contestable markets
What is a contestable market? A market which can be entered without cost and left without loss
Define contestability. The extent to which firms can enter or leave a market without cost
State conditions needed for a perfectly contestable market. Markets are a perfectly contestable
given no barriers to entry or exit and identical unit costs for incumbents and potential entrants
Describe the implications of contestable markets. In contestable markets incumbents (existing
firms) face the threat of competition from potential entrants. Incumbents take into account the likely
response of rivals when setting price. If firms set a price yielding supernormal profits, incumbents face
a threat of increased competition from new entrants threatening market share and future profit levels.
Identify factors that determine contestability. The size of the pool of potential entrants and extent
of barriers to entry and exit determine the degree of market contestability.
Give examples of contestable markets in action. Given low barriers to entry, any bus company
earning supernormal profit on any one route, faces the threat of competition from new entrants.
How can deregulation lead to greater contestability? Removing legal barriers to entry makes it
easier for new firms to join a market and challenge incumbents.
Draw a diagram to show the impact of
contestability. Profit maximsing output occurs
where MC=MR. If Q1 is produced at P1, supernormal
profits of (P1-P2) x Q1 are earned.
However, supernormal profits encourage rivals to
enter the industury provided barriers to entry and
exit are low. Firms wanting to avoid the threat of
competition may use limit pricing and set output at
Q2 and charge P2 where P=AC. Earning normal profits
leaves no incentive for entry by rivals. Incumbent
pricing choices is shaped by the threat of competion
What are the benefits of contestability? The threat of competition gives incumbents an incentive to:
cut price, earn normal profits and avoid new competition. Lower prices raise consumer surplus
eliminate x-inefficiencies to cut AC so as to be able to cut price and so deter potential entrants
finance R&D in an attempt to improve products and productivity and so remain competitive
What are the drawbacks of contestability? A rise in contestability increases completion:
lower supernormal profits reduces funds available for R&D leading to lost dynamic efficiency
more firms in the industry mean lost economies of scale hence higher LAC and so higher prices
more services on existing routes generate extra negative externalities eg if two buses now
operate half full there is a waste of scarce resources and allocative inefficiency
Explain the difference between a perfectly competitive and contestable market. In perfectly
competitive markets actual competition exists between a large numbers of firms making identical
products. In a contestable market potential competition exists between any number of firms whose
output may be homogenous or differentiated
Why do governments take measures to improve contestability? By increasing the threat of
competition monopolists and oligopolies act as if they were in competitive markets. Increased
completion increases supply and lowers price. Allocative efficiency improves.
List government policies to improve contestability.
Deregulation removes legal barriers to entry making it easier for firms to join a market
Short franchise periods mean incumbents face potential competition in the near future
Creating leasing companies eg ROCOs in the rail industry reduces sunk costs.
| Contestable markets
17
Franchising
What is a franchise? In transport, a franchise is the right to operate a given service on a given route,
to a given standard, for given period of time
Give examples of franchising. Firms have won contracts to run train services and London bus routes
How are franchises awarded? Franchises are awarded following a competitive tendering process.
Explain the competitive tendering process. Firms bid for a contract to operate a service on a given
route for a given number of years to a standard defined by the franchisor. Generally, the firm making
the highest bid is awarded the franchise.
Explain the benefits of franchising. Franchising
introduces competition: the tendering process means firms to compete to win the contract to
operate a route. Competition means firms strive for productive efficiency as, by reducing costs,
they can increase their bid and still make sufficient profit if successful. Increased competition
lowers fares and so increases consumer surplus
increases contestability: there is the threat of competition when the contract is up for renewal
transfers some supernormal profit to government if bidders use profit to increase their bid
18
Franchising |
Deregulation
What are regulations? Regulations are legally enforced rules that restrict or ban specified activities.
How can regulations affect competition? Laws establishing legal monopolies act as a barrier to
entry restricting competition from entrants and reducing consumer choice.
Define deregulation. The removal of legally enforced rules that restrict or ban specified activities.
Outline the impact of deregulation. Impact depends on the type and extent of deregulation eg
removing legal barriers to entry and makes it easier for firms to enter the market.
How can deregulation affect competition?
Deregulations reducing or removing legal barriers to
entry and makes it easier for firms to enter the
market. Competition increases; new entrants
increase supply
Use a supply and demand diagram to show the
impact of deregulation on a market. S1 is initial
supply in a regulated market. Deregulation reducing
legal barriers to entry makes it easier for new firms
to join the industry. Supply increases shifting the
supply curve to S2. Price falls to P2 with Q2 Q1
more journeys undertaken. Consumer surplus
increases by (P1,J,K,P2)
How does deregulation affect contestability? Deregulation removes legal barriers to entry and
makes it easier for firms to enter the market. Lower barriers to entry make markets more contestable.
Analyse the impact of deregulation on allocative
efficiency. A profit maximising monopolist sets output
at QM where MC=MR. Deregulation removes legal
barriers to entry and so encourages competition. The
entry of new firms moves price and output towards
price and output set in perfect competition ie PC and QC.
Allocative efficiency improves.
Analyse the impact of deregulation on productive
efficiency. Competition gives inefficient incumbents an
incentive to cut unit costs so as to be able to cut prices
and remain competitive. Eg eliminating organisational
slack reduces x inefficiencies and improves productive
efficiency. Lower unit costs means incumbents can
match the price of new entrants
What are the drawbacks of deregulation? Deregulation increases competition which can mean
lower supernormal profits so less funds available for R&D leading to lost dynamic efficiency
more firms in the industry so lost economies of scale hence higher LAC and so higher prices
more services on existing routes leading to more negative externalities eg if two buses now
operate half full there is a waste of scarce resources and allocative inefficiency
Does deregulation always increase competition and contestability? Impact depends on:
the extent of existing regulation and the type and scope of deregulation measures
whether or not other barriers remain: deregulation removes legal restrictions on firms joining
an industry but high start-up costs or incumbents cost advantage from EoS may deter entrants
may vary by region, industry and be different in the short and long run
| Deregulation
19
Privatisation
Define privatisation. Privatisation is where state owned firms are sold to the private sector
How does privatisation affect competitiveness? In theory privatisation allows private sector firms
to join an industry so improving competitiveness.
How can privatisation impact on economic efficiency? Some argue that unlike nationalised firms:
private sector have incentives to eliminate x-inefficiencies to reduce unit costs to either lower
prices to retain or attract customers, or improve profits. Productive efficiency improves
competition moves market price closer to MC. Allocative efficiency improves
firms invest in greater research and development to develop innovative products which
increase sales, or improved production techniques that cut costs. Dynamic efficiency improves
Identify arguments for privatisation. Advocates argue private sector firms have an incentive to
Eliminate x-inefficiencies associated with state owned corporations which, if passed on, result
in lower prices or lower subsidy requirements
Improve quality eg reliability leading to increased use of public transport
Increased use of public transport generates positive externalities eg a switch from cars to trains
Private sector investment is introduced overcoming decades of public sector under investment
Government borrowing is reduced if it is no longer required to support transport operators
20
Privatisation |
Market Failure
Economic Efficiency
What is economic efficiency? Economic efficiency is making best use of scarce resources
How is economic efficiency achieved? Economic efficiency occurs in a market when both allocative
and productive efficiency are achieved.
Explain allocative efficiency. Allocative efficiency occurs at the level of output where price equals
marginal cost. This means scarce resources are used in a way that maximises consumer satisfaction.
Why is allocative inefficiency a problem? It results in a misallocation of scarce resources. Factors of
production can be put to better use making products consumers value more highly, given their cost.
What is the condition for allocative efficiency? Allocative efficiency occurs when firms set output at
a level where selling price = marginal cost of production ie P=MC
What is productive efficiency? Productive efficiency occurs when firms are maximising output from
given inputs and thus producing output at lowest possible unit cost.
What is the condition for productive efficiency? Productive efficiency occurs when firms are
producing at lowest possible unit cost on the lowest possible cost curve ie MC=AC
Why is it important to achieve productive efficiency? Productive efficiency means firms are
maximising output from given resources and are producing at lowest unit cost
How does competition encourage productive efficiency? Competition energises firms to seek
productive efficiency gains and produce at lowest unit costs to avoid losing sales to more efficient
rivals. Unit cost reductions are passed onto consumers in the form of lower prices.
Explain X-inefficiency. X-inefficiency means a firm is
using more inputs than is needed for a given level of
output. Actual unit costs (AC1) exceed lowest
attainable unit cost (AC2).
What causes x-inefficiency? X-inefficiency is caused
by organisational slack where firms opt to employ
more resources than are needed to produce a given
level of output. Staff and capacity are under used
Why are firms x-inefficient? Managers in firm
operating in uncompetitive markets have little
incentive to minimise unit costs.
Define dynamic efficiency. When firms make productive efficiency gains over a period of time
How is dynamic efficiency achieved? Dynamic efficiency gains occur over a period of time as a result
of successful research and development (R&D) which converts new scientific and technological ideas
into a) new processes that raise productivity and lower unit costs and b) new, improved products
What is R&D. R&D is an abbreviation of research and development: the process of applying new
scientific and technological ideas to improve products and processes ie innovation
Why is R&D important? Successful R&D results in dynamic efficiency gains from improved
production processes which lower long run average costs and so give firms a competitive advantage:
lower unit costs may be passed on as lower prices to gain price competitiveness.
firms can capture sales from rivals by offering new improved products.
Explain the link between profit and dynamic efficiency. Monopolists can use super normal profits
to finance R&D. Firms in competitive markets earning normal profits may not be able to finance R&D
Do monopolists always use supernormal profits for R&D? Monopolists may opt to retain profits or
distribute profits to owners. In the absence of competition is there any incentive to finance R&D?
| Economic Efficiency
21
Market failure
Define a free market. In a free market, the forces of supply and demand alone determine price and
output without any government intervention. Free markets are totally unregulated.
What is market failure? Market failure occurs when free markets make an inefficient use of scarce
resources by failing to deliver allocative or productive efficiency.
Why is market failure a problem? Productive inefficiency means firms are not maximising output
from given inputs. There is lost potential output. Allocative inefficiency means scarce resources are not
being used in a way that maximises consumer satisfaction. Factors of production can be put to better
use making products consumers value more highly, given their cost.
Why can transport markets fail? Reasons why transport markets can fail include:
the impact of externalities such as pollution is overlooked by producers and consumers
roads are a quasi-public good. The free rider problem means private sector firms will not
supply an allocatively efficient amount of road space
monopolies may use their market power to set a price that maximises profits , not efficiency
transport markets can generate inequity and social exclusion eg when inability to pay means
low income households are denied access to transport
What is government failure? Government failure occurs when state intervention increases economic
inefficiency - an even more inefficient use of resources than that made by free markets results.
Public goods
What is a public good? A public good is a product which is both
non-rival: individual's consumption does not reduce the satisfaction enjoyed by others, and
non-excludable: once provided users cannot always be excluded from consumption
Define free rider. A consumer who obtains benefit from a public good without paying for it directly.
What is the free rider problem? Non-excludability means use of public goods cannot be made
conditional on direct payment to firms. By avoiding payment, free riders reduce revenue making it
difficult if not impossible for firms to operate at a profit. This means free markets fail to provide
socially optimum quantities of public goods such as roads.
What are quasi-public goods? A quasi-public good is a near public good ie it has many but not all the
characteristics of a public good. Roads are an example of a quasi-public good
Semi non-rival: extra users do not initially reduce the amount of road space available to others.
Finally extra drivers cause peaking, congestion and so reduce journey times for other users
Semi non-excludable: drivers can be excluded by regulation: only adults with a driver licence,
insurance and VED disc can legally drive cars on UK roads. Non payers can be excluded by
construction toll booths or using IT based satellite tracking although is a costly process
Justify direct provision of roads by the state. Roads are a quasi-public good. The free rider problem
means free markets under produce roads leading to market failure. State intervention to build and
maintain the socially optimum amount of roads is required to ensure allocative efficiency. UK
highways are financed from taxation eg petrol duty and VED
How do highway improvements affect consumer
surplus? A road improvement scheme reduces price of
a journey from P1 to P2 causing an extension in demand
of (Q2-Q1), Extra journeys are generated
The benefit to existing users is P1 L N P2.
The benefit to generated traffic is L N M.
The total rise in consumer surplus is P1 L M P2
22
Market failure |
Negative externalities
Define positive externalities. Positive externalities exist when third parties receive benefits from the
spill over effects of production or consumption for which they do not pay
Why do positive externalities cause market failure? If economic agents ignore the external benefits
of their actions, under-consumption of a product causes market failure, hence allocative inefficiency
Give examples of positive externalities in transport. A new motorway generates third party
benefits including reduced transport cost for local firms and generates a regional multiplier effect.
Define negative externalities. Negative externalities occur when production or consumption
imposes costs on third parties who receive no compensation
Why do negative externalities cause market failure? If economic agents ignore the external costs of
their actions, over-consumption of a product causes market failure, hence allocative inefficiency
List negative externalities associated with transport. Increased transport often means more
Noise pollution affecting people living near roads or under flight paths
Air pollution eg vehicle CO2 emissions affect local residents and sustainability
Congestion: as more vehicles join a traffic flow and increase journey times for others
Accidents causing increased loss of life and injuries
Visual intrusion: infrastructure impacts on the landscape or people's enjoyment of it.
Blight where the threat of say, a new airport runway, creates uncertainty and lengthy planning
processes which adversely affect local economies eg it is hard to sell houses
Give examples of negative externalities in transport. The adverse spillover effects of a car journey
include air pollution from emissions. Infrastructure projects such as a new motorway link result in loss
of rural land for current and future generations ie sustainability issues
Define shadow pricing. A monetary value is estimated for outcomes with no market price eg noise
Analyse how externalities are valued by economists. Methods include:
Shadow pricing: the external cost of congestion can be calculated by multiplying the number of
hours lost by the average wage eg 1m lost working hours x 12 average hourly wage = 12m
Compensation: estimate the cost of putting right an externality eg include the cost of installing
double glazing in houses affected by increased road noise from a new motorway. If 200 houses
are affected each with 5,000 double glazing cost, increased road noise is estimated at 1m
Revealed preference: how much people are willing to pay to avoid an externality eg if 200
householders are willing to pay 2,000 each to avoid noise, the externality is valued at 0.4m
Use a graph to show market failure from negative
externalities: over production
The supply curve S shows the firms marginal private
cost of production (MPC) S= MPC.
Given negative externalities such as pollution, an
estimate of marginal external cost (MEC) is added to
the MPC curve to give the marginal social cost (MSC)
curve: MSC = MPC + MEC.
The demand curve is a measure of private marginal
benefit. If no positive externalities exist then D
shows social marginal benefit: D = PMB = MSB.
The equilibrium level of output delivered by a free
market, Q1, is allocatively inefficient. SMB = SMC at Q2. The market has overproduced by (Q2Q2). The
welfare loss triangle JKL gives the amount of welfare loss from overproduction and is equal to the
amount of lost consumer and producer surplus.
Define deadweight loss. Deadweight loss is an estimate of allocative inefficiency from market failure
Are road user generated negative externalities uniform? The impact of road users depends on
geography, time of day and type of vehicle.
| Negative externalities
23
Indirect taxes
Outline the problems in using environmental taxes. The aim of an indirect tax is to make the
polluter pay and so internalise the externality. However implementing taxes is problematic
Setting the right tax rate if the monetary value of a negative externality is hard to measure
Cost of collection: road charging requires expensive infrastructure eg IT system of billing
Inelastic demand: higher petrol prices via higher indirect taxes has little effect on demand
Redistribution effects: Indirect taxes are regressive and affect low-income household most.
Increased costs. Higher indirect taxes may cause inflation affecting consumers who did not
pollute and international competitiveness if taxes are higher in one country than another.
What is VED? Vehicle excise duty is a tax paid for a licence for a car to use public roads ie tax discs
How can Vehicle Excise Duty reduce negative externalities from road transport? Vehicle Excise
Duty (VED) is an annual indirect tax on car ownership which varies by type of car based on CO2
emission rates per kilometre. Low polluting cars pay no VED. High polluting cars pay higher VED.
Comment on the effectiveness of VED in addressing market failure form negative externalities.
VED bands do reflects the level of pollution by car type: high polluting car owners pay more VED than
low polluting car owners. However VED is an annual payment the amount of VED paid does not vary
according to the number of miles travelled
Hypothecation
Define hypothecation. Hypothecation is the ring fencing of taxes to finance
spending solely within the area taxed eg the use of congestion charges to
subsidise public transport not health
Congestion
18bn
Accidents
3bn
Air Pollution
3bn
Noise Pollution
1bn
Total
25bn
In 2000 The Adam Smith Institute reported road users pay 32bn in tax
revenues each year but receive back only 6bBn in road investment - a
shortfall of 26bn. However the same reportii valued negative externalities
generated by road traffic at 25bn an argument against hypothecation
24
Indirect taxes |
25
What is the effective level of road pricing? Road pricing corrects market failure if it is set equal to
the external cost of a journey. Ideally tolls vary according to time, distance, place, the level of vehicle
emissions and number of passengers.
How effective is indirect taxation in reducing market failure from car transport? The bigger the
indirect tax rise the greater the fall in car use. Effectiveness depends on whether it is one policy used
as part of an integrated strategy. If so, modal shift is more likely to occur.
How is flexible road pricing implemented? By fitting GPS sensors in cars that record the time,
distance and place of a journey. Motorists are charged based on when, where, and how much they
drive. Each journey has its own road price equal to its external cost, say,43p per kilometre in a city
centre at peak time and 0.8p on empty rural roads
Give an example of GPS based road pricing scheme. Germany uses sensors in lorries linked to
satellites to set tolls for lories.
Why are GPS road pricing systems not used in private cars? Using sensors to monitor journeys
does not command public support and raises significant civil liberty issues.
Why is the demand for peak time road usage price inelastic? Certain journeys can only be
undertaken at a given time of day on a given route eg city centre commuting before 9 00am. The
convenience and flexibility of cars, and poor quality of public transport substitutes, means there are
few close available substitutes commuting by car making demand highly price inelastic
Set out arguments for road pricing Congestion is caused by demand exceeding capacity on given
networks at given times eg mid-week peak times. Road pricing:
forces polluters to internalise their externalities and include the estimated cost of their
negative externalities in their decision making. Users pay for the social cost of their actions
generates revenue for hypothecation eg subsidies for public transport substitutes
encourages modal shift: higher prices encourage commuters switch to the now relatively
cheaper substitutes: public transport.
Set out arguments against road pricing. Road pricing:
the tax must be set at a level that internalises the externality. Set too high and underconsumption results; too low and over-consumption continues ie government failure occurs
requires alternative modes of transport to enable modal shift and allow motorists to switch
from cars to close, available substitute public transport eg trains and buses
has minimal impact on road usage if demand is price inelastic eg peak time in urban areas.
High charges are needed to cause significant falls in road usage
may displace rather than reduce car usage unless the scheme is comprehensive covering all
road networks
has high set up, maintenance, monitoring and enforcement costs
increase costs of production which is inflationary and reduces competitiveness of local firms if
rivals in other regions have free road access. International competitiveness is reduced
is a regressive tax raising equity and social inclusion issues if low income groups are priced
out of using cars. High income groups are unlikely to be deterred as they can still afford to pay
What factors affect the success of road pricing or subsidies? Price is one factor affecting the
demand for road travel. If there is no alternative bus or rail services, the lack of close substitutes
makes demand highly price inelastic. High tolls are required to reduce demand to socially optimum
levels. This means road user charging is more likely to be effective if introduced alongside other
policies eg subsidies for substitute public transport and integration policies which allow modal shift
over parts of a journey eg park and ride schemes
26
Subsidies
What is a subsidy? A subsidy is a payment made by the government to producers or consumers to
encourage production or consumption.
How are subsidies used in public transport? Subsidies can be given by the state to reduce operating
costs and so allow operators to lower fares or the cost of capital and infrastructure improvements eg
for new buses and bus lanes
How do subsidies affect price? A producer subsidy lowers costs of production. Firms increase supply
resulting in a lower price and higher output.
How do subsidies affect modal shift? Subsides for
public transport reduces their price and encourages
car user to switch to relatively cheaper alternative
modes of transport.
Draw a diagram to illustrate producer subsidy. A
subsidy = Su reduces firms costs of production. Firms
increase supply at all market prices causing an
outward shift in the supply curve to S2. Equilibrium
market price falls from P1 to P2 and output rises to Q2
What is the cost of the subsidy? Consumers use to
pay P1 but now pay P2. Firms use to receive P2 but
now get P3. The subsidy costs the govt (P3-P2) x Q2
How are subsidies financed? State subsidises are financed from general taxation or by borrowing
Why subsidise public transport? Advocates argue effective state subsidies
move output away from the market to social optimum level so improving allocative efficiency
encourages a modal shift away from private cars and so create positive externalities and
improves sustainability
improve social equity and reduce social exclusion as low income households who cannot afford
cars now have access to transport
How effective are subsidies in encouraging commuters to switch from road to rail? Road and rail
are substitutes. A rail subsidy makes tickets cheaper and encourages car commuters to switch from
cars, depending on the cross elasticity of demand value between cars and trains. The easier it is for
commuters to switch easily from cars to rail, the more effective subsidies are in reducing road travel.
Outline arguments against state subsidies. Critics argue state transport subsidies
may encourage x-inefficiency as firms can use subsidies to cover the cost of organisational
slack
are ineffective if the demand for public transport is price inelastic. Very large subsidies are
required to increase the number of travellers using public transport
affect only one factor determining demand: price. Non price factors such as poor reliability and
comfort may mean consumers do not use public transport even after a price fall from subsidy
may be absorbed by firms as profit rather than passed onto consumers as lower prices
are expensive and represent an opportunity cost
Comment of the effectiveness of subsidies. The impact of subsides depends on the size of the
subsidy and whether or not demand is price elastic. Subsides used in isolation are less effective than if
part of strategic integrated solution eg in combination with a road pricing scheme.
Effectiveness also depends on how the subsidy is used: capital subsidies improve the quality of public
transport and so improve consumer perceptions increasing demand and making income elasticity of
demand for public transport positive and more elastic.
| Subsidies
27
Regulation
Define regulation. Laws that ban or restrict specified activities.
What are standards? Government standards set out legal requirements for a given economic activity
eg the allowable level of C02 emissions above which a car fails its MOT
Why use regulation? Governments can use the law to change the behaviour of economic agents in
ways which the state believes will improve the use of scare resources. Compliance with regulation and
standards moves market output towards the social optimum level
Give examples of transport regulations. MOTs, the London Emissions Zone and restrictions on car
usage in city centres
How can regulation correct market failure? In a free market, the forces of supply and demand
determine the level of output. Regulation overrules market forces and sets a standard for desired
consumer and producer behaviour. Compliance moves market output towards, or ideally to, the social
optimum where marginal social cost equals marginal social benefit.
Describe the regulation process. Regulation uses two-step process: command and control
command: regulation sets a standard for a given activity defining what is and is not legal
behaviour eg the maximum level of C02 emissions above which a car fails its MOT
control: regulations are enforced using sanctions. Economic agents must comply with a
regulation or risk fines or imprisonment thus giving an incentives to change behaviour
Explain the role of monitoring and enforcement. Regulation corrects market failure only if it causes
economic agents to change their behaviour in desired ways. Some consumers and producers may
chose to ignore regulations. Effective regulation requires
monitoring by police to check economic agents are complying with the law
enforcement using fines or imprisonment to compel observance of the law
Describe various forms of regulation. The government can pass and enforce laws that:
ban activities leading to market failure eg price fixing by cartels
limit a given activity eg cap allowable noise levels airplanes; introduce output quotas
require a given activity from eg compulsory wearing of seatbelts
How can regulation affect costs of production? Costs may increase if firms have to change
production processes or hire staff to meet legal standards. Firms cut supply at all market prices and
the supply curve shifts to the left. Price rises and output falls
Use a diagram to show how regulation can affect supply. In each diagram P1 and Q1 is the
equilibrium price and output in free markets. Q2 is the social optimum level. Regulation can:
aim to increase firms costs of production so
shifting the supply curve shifts to the left. The
price increase to P2 leads to a contraction in
demand with output at Q2 the optimal level
28
Regulation |
Give examples of regulations used to solve market failures arising from negative externalities
Set legally enforced standards for eg maximum level of air and noise pollution from planes
restrictions over landing slots and number of flights allowed at night
Give examples of regulations used to solve market failures from abuse of market power
Price controls: use a RPI X% formula. If the RPI is 3% and the inflation rate is 2%, then firms
must reduce prices by 1% every year through increased efficiency or lower profit margins.
Define a regulator? A government agency that monitors the performance of firms in an industry
Give an example of a transport regulator. The Office of Rail Regulation (ORR) ensure Network Rail
complies with standards on eg punctuality, productivity, investment for dynamic efficiencies
Explain yardstick competition. Regulators assess the performance of a firm against other similar
firms. Eg he McNulty Report found UK rail industry costs are 30% higher than European railways.
Yardstick competition can introduce comparative competition eg the ORR has set Network Rail a
target of closing this efficiency gap by 2019 to match the performance of European railways.
Describe the benefits of regulation. Regulations
set clear standards for activities to avoid market failure, and the costs of non-compliance
can be introduced quickly and at little cost to the state. Laws can have an instant impact.
Fines give economic agents an incentive to comply and can finance enforcement costs
| Regulation
29
Sustainability
What is sustainable development? Sustainable development meets the needs of the present without
compromising the ability of future generations to meet their own needsiv.
How does transport threaten sustainability? Travel generates negative externalities eg pollution
which damages ecosystems and depletes non-renewable resources, eg oil, so reducing the ability of
future generations to meet their own needs
Are all modes of transport equally unsustainable? Car journeys generally generate more negative
externalities per passenger kilometre travelled than public transport by rail and bus. Road freight
transport results in more negative externalities per tonne kilometre than rail. Air travel creates
negative externalities eg noise and air pollution and contributions to climate change
Are all planes, trains or buses equally unsustainable? There is a significant variation in the levels
of sustainability within a given mode eg latest planes Boeing Dreamliner are more fuel efficient and
generate lower emissions than older model planes. This means each flight generates fewer negative
externalities and uses up less non-renewable resources on a given journey.
How can transport infrastructure projects threaten sustainability? A new road means visual
intrusion and the loss of countryside that is now no longer available for present and future
generations to enjoy. Where new roads generate extra traffic, extra negative externalities result
Why is road transport unsustainable? Cars and HGVs burn fuel and so produce CO2 emissions that
damage ecosystems so reducing the ability of future generations to meet their own needs.
Is public transport more sustainable than private car journeys? The mass transit nature of public
transport means lower negative externalities per passenger than the same journey by car assuming
the bus or train has a high loading. This means public transport reduces market failure arising from
over consumption and so improves allocative efficiency. Better use is made of scarce resources.
Are all flights equally polluting? Planes burn most fuel during take-off. Therefore short flights are
disproportionately polluting. Modern planes are more fuel efficient than older models
Do buses generate negative externalities? Buses and coaches are mainly powered by diesel engines
and so contribute to air pollution, particularly in busy city centres. Where privatisation or
deregulation results in more bus services with lower loading, extra negative externalities result
How can integrated transport contribute to sustainability? Convenience affects the demand for a
given mode of transport. Improving the ease with which users can switch between modes, promotes
more use of low polluting public transport over part of a journey previously undertaken solely by car.
What is the aim of integrated transport policy? Integrated transport policy aims to shift travel
from less to more sustainable modes of transport eg a modal switch from road to rail.
List factors blocking a modal shift from private cars to public transport. Modal shift occurs only
where public transport is a close and available substitute for a given journey. The unavailability or
relatively high cost of public transport and poor quality and reliability also inhibits modal shift
What are sustainable transport policies? There are three types: policies which
achieve modal switch eg passengers (or freight) traffic moves away from road to rail
reduce demand for unsustainable modes eg indirect taxes on cars (congestion charging) or air
travel (APD) raise price and so contract demand leading to less use of scarce resources
use policies to reduce negative externalities eg regulations
List potential sustainable transport policy measures. Potential government measures include
indirect taxes equal to external costs eg road pricing and APD. Higher prices reduce quantity
demanded and overconsumption leading to a more allocatively efficient use of resources
public transport subsidies reduces the relative price of trains, etc encouraging modal shift away
from high polluting private cars. Lower pollution improves allocative efficiency
regulations such as higher emission standards reduces output and overconsumption so
improving allocative efficiency
Tradeable permits for CO2 emissions from planes gives high polluting firms an incentive to
reduce emissions. Lower pollution improves allocative efficiency.
30
Sustainability |
UK Transport Industries
Bus Industry
What is the UK bus industry? The UK bus industry has two main submarkets: local bus services and
national services from city to city.
Is the bus industry deregulated? In the 1985 the bus industry outside of London was privatised and
deregulated. Any operator meeting health and safety regulations can now provide a bus route.
Are some routes subsidised? Local governments invite firms tender to run a socially necessary but
unprofitable route and award the contract to the operator requiring the least subsidy.
Outline the main findings of the Competition Commission report on Local Bus Services 2011
There is a high concentration ratio of 69% five firm for local bus services in urban areas
Most urban areas have just one or two operators but this varies in different areas and routes.
The level of demand on many routes is not sufficient to support multiple operators
In many local markets there is limited head-to-head ie direct competition
Passengers take the first bus that arrives so firms compete by varying service levels, not price
In the short run, non-price competition increases supply but results in losses. In the long run
sustained losses force firms to exit the market generally resulting in a monopoly
Incumbent local bus operator may respond to the threat of potential competition by lowering
the prices of network tickets and increasing the quality of their network. Contestability falls.
there are substantial sunk costs in entering the bus market for a given route
What is the likely income elasticity of demand for buses? Many consumers view buses as
unreliable, poor quality inferior good. This means the income elasticity of demand value is negative. If
the YED value for buses is say -2 and 10% rise in income results in a -2x10% = -20% fall in demand
Outline sustainability issues in local buses. A bus service involves mass transport. By moving
passengers out of cars, buses reduce overall negative externalities.
How is franchising used in the bus industry? The regulated London bus market using franchising to
introduce competition: Transport for London (TfL) invites bids for 5 year franchises to operate a given
route with a 2 year extension if performance targets are met.
Summarise the impact of deregulating local buses
Initially deregulation made markets more competitive and contestable
The initial increase in competition led to more frequent services, lower fares and more buses
operating below full capacity increasing air pollution levels in crowded city centres
To cut costs and raise productive efficiency operators introduced small hopper style buses
In the long run, competition results in losses leading to the exit of one operator and a local
monopoly on those routes where demand is insufficient to support more than one operator
Operators with significant economies of scale can use limit pricing to inhibit competition
Outline the factors determining the impact of deregulation. The impact of deregulation
varies from area to area. In some regions the bus market is monopolistically competitive; more
typically the local market is a monopoly
depends on the extent to which other barriers to entry remain eg high set up costs such as a bus
fleet, marketing to establish their brand and ticketing arrangements
the type of bus market eg local or national
Is the bus industry contestable? Deregulation means entrants can challenge incumbents on
individual routes. However barriers to entry and exit have emerged:
Cost: incumbents enjoy economies of scale not open to new entrants. Set up costs are reduced
by leasing, operating older vehicles or small hooper style buses
Branding: Advertising may be necessary to persuade customer to switch loyalty from branded
rivals a significant sunk cost
| Bus Industry
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Rail Industry
Outline the history of the rail industry. In 1946 the UK rail industry was nationalised and operated
as an integrated public corporation. British Rail owned and run infrastructure and operations.
In 1996 the UK rail industry was privatised and split up into four sections
Infrastructure: Network Rail (NR), owns and operates track, signalling and stations. Revenue
comes from charging TOCs for use of the lines and government subsidies. NR is a natural
monopoly: economies of scale are so substantial that a single firm can produce at lower unit
cost than two or more firms. The McNulty Report 2011 identified an efficiency gap of 30%
between NR and top performing European rail infrastructure firms ie NR unit costs are higher
Passenger Operations: Train Operating Companies (TOCs) are private sector firms that run rail
passenger services, leasing and managing stations from NR. They have typically won a time
limited franchise to supply rail services over given routes to a given standard. TOCs revenue
comes from ticket sales and subsidies. They normally lease trains from ROSCOs. Franchising
introduces periodic competition to join or remain in the industry. The McNulty Report finds
that since privatisation unit costs have shown relatively little improvement and that passenger
fares per passenger-kilometre on average are around 30% higher in GB than in Europe.
Freight Operations: Freight Operating Companies are privatised firms that use the rail network
to transport goods eg coal. They operate without subsidy in a highly competitive market with
intermodal competition from road haulage. The McNulty Report 2011 finds freight unit costs
have fallen by some 30% since privatisation indicating productive efficiency gains
Rolling stock companies (ROSCOs) lease out train carriages thereby lowering set up and sunk
costs and improving contestability
How is franchising used in the rail industry? The Department for Transport (DfT) invites rival train
operating companies (TOCs) to bid for a franchise to run a given rail service for around 15 years.
Franchises are awarded to the TOC bidder making the highest bid and requiring the lowest subsidy.
Why are some rail services subsidised? TOCs require payment if they are to run loss making but
socially necessary services eg on rural routes or late at night
Who regulates the rail industry? The Office of Rail Regulation (ORR) monitors Network Rail to
ensure it manages track efficiently and does not exploit its monopoly power.
Can TOCs set their own fares? TOCs set around half of fares according to market conditions.
Regulated fares, eg season tickets, are set by government using the formula the RPI + 1%.
What is a public service obligation? A public service obligation is the subsidy given to TOCs to
ensure loss making but socially essential services operate eg rural lines and late night services
Does data suggest the UK rail industry is efficient? The McNulty Report (2011) benchmarked the
UK rail industry against their European counterparts and found that states UK rail industry costs are
30 per cent higher than comparable railways elsewhere in Europe.
What are Open Access Operators (OAOs)? Open Access Operators run train services on routes not
served by a franchise. OAOs purchase a slot on the network eg London-Heathrow Express
Is the rail passenger market competitive? TOCs have monopoly rights to supply rail services over
given routes for a period of 15 years. If a potential entrant identifies a new market for train services
not currently served by a franchise, they can apply for open access rights to run those trains.
What is smart ticketing? A single ticket is valid on many modes of transport run by many operators
by more than one operator and, ideally, for more than one mode of transport. Smart ticketing
improves integration and encourages modal shift
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Rail Industry |
Aviation industry
Outline various airline
submarkets. The aviation
industry is made up of a
number of submarkets.
Each submarket has its own
characterisitcs eg the
factors affecting the
demand for budget airlines
is very different to schedule
flag carriers such as BA.
Outline the main feature of the aviation infrastructure. UK airports are owned and operated by a
private sector companies eg BAA. Air traffic control is provided by National Air Traffic Services (NATS),
a company owned by the government and a group of UK airlines who are the controlling shareholders.
Distinguish between hub and secondary airports. A hub airport is a major airport offering a large
number direct flights to many other airports eg Heathrow. A secondary airport is a minor airport
offering a limited number of direct flights to a small number of other airports eg Luton
Who regulates the aviation industry? In the UK, the Civil Aviation Authority (CAA) responsible for:
Economic regulation eg setting the maximum landing fee airports can charge airlines and
charges per passenger for the use of a terminal.
Airspace policy eg the CAA issues operating licences to airlines to operate a route
Safety regulation and consumer protection.
What are the main challenges facing UK aviation.
Air travel demand at UK airports is forecast to more than double from 228 million passengers
per annum (mppa) in 2005 to 495mppa in 2030 Source: DfT v threatening sustainability
Aviation infrastructure has insufficient capacity to meet the forecasted growth in air flights,
leading to calls for new runways
Air travel generates significant noise and air pollution. Increasing negative externalities means
the government is expecting polluters to pay with higher taxes of flights
Sustainability: CO2 emissions mean more air flights contribute to faster climate change
Why is demand for air travel rising? The demand for flights is a derived demand. Increasing world
economic growth and economic integration means more international passenger travel and movement
of freight. 25% of the UK's visible trade is carried by airvi.
Explain the rapid growth of air travel. Factors include
Increased disposable income from growth means consumers travel more often (short break
holidays) and further (long haul holidays) - especially as air travel is highly income elastic
Falling price of complements eg falling hotel prices and rising price of substitutes eg rail fares
Low cost airlines have emerged increasing supply and so extending demand
Globalisation results in more business trips and air freight
Who dominated air passenger transport in the 1990s? Nations negotiate bilateral (two way
agreement) landing rights for a fixed number of flights by flag carriers creating legal barriers to entry
Distinguish between budget and premium carriers. Premium carriers eg BA operates scheduled
flights from hub airports charging premium prices. Budget airlines such as easyJet are called low cost
carrier (LCC) or no-frills carrier and operate from regional airports
State the characteristics of LCCs. LCCS offer an undifferentiated service on-board ie one standard
class; high density seating; no frills eg free drinks; frequent yer schemes
Outline the impact of deregulated air travel. Deregulation of the EU airline market in the 1990s has
removed a legal barrier to entry. Any carriers from any member State can y on any route throughout
the EU and set its own deregulated prices.
How have LCCs affected competition? LCCs have increased competition in the short haul, budget and
leisure segments resulting in lower fares, new destinations and greater frequency on popular routes.
| Aviation industry
33
Explain open skies policy. An open skies policy deregulates international air travel. In its ideal form
legal restrictions on routes, prices and frequencies, capacity, or types of aircraft are abolished. An open
skies policy increases contestability and competition between airlines, resulting in lower fares, new
destinations and more flight frequency
What are airline alliances? Alliances are an agreement between two or more airlines to cooperate.
How do airline alliances affect costs? Shared operations and maintenance result in economies of
scale which if passed on to consumers lead to lower fares. Productive efficiency improves.
How do airline alliances affect competition? Alliances create barriers to entry. The convenience of
airline alliances encourages consumers to use the members rather than competitors. Rival airlines
cooperate rather than compete of routes leading to potentially higher fares and less frequent services.
Is aviation a contestable market? This depends on the route and sub market. Barriers include
Government regulations eg bilateral treaties (Air Services Agreements) can restrict entry
The high entry cost of acquiring a fleet of planes, landing slots and promotion costs to establish
market brand are deterrents to entry.
Significant economies of scale enjoyed by incumbents
Increasing alliances between national flag carriers restrict non-member new entrants
On exit firms may not recover fees paid for landing slots. Marketing costs are irrecoverable.
These high sunk costs reduces contestability on the given route
How can operators reduce the impact of air flights on the environment? Airlines can
Use larger planes to carry the same number of passengers in fewer flights
Introduce latest aircraft utilising fuel conserving and noise reducing green technologies while
phasing out old fuel inefficient planes
Improve air traffic control management so fewer planes are in holding stacks waiting to land
What is Air Passenger Duty? Air Passenger Duty (APD) is an indirect tax paid by consumers. The aim
is to make polluters pay and force passengers to internalise their externalities
How can Air Passenger Duty reduce negative externalities from air transport? Air Passenger
Duty (APD) is an indirect tax on passengers flying from UK airports, based on distance travelled.
Critics argue APD takes no account of the efficiency of planes passengers using latest aircraft with
green technologies are taxed at the same rate those using older planes for identical trips.
Why is aviation infrastructure stretched? In the UK and Europe, the supply of airspace and landing
slots at major cities is limited. Increased demand means hub airports lack the capacity to handle the
projected number of flights. Eg in 2013 Heathrow is operating at 98% capacity. The current Coalition
Government has ruled out a third runway or any further increase in capacity in the South East
How can government mange restricted airport capacity?
Outline the trade-off between growth and sustainability. Heathrow is the worlds largest airport in
terms of passenger number. Its role as a major international hub generates income, employment and
tax revenues but also significant negative externalities eg noise and air pollution.
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Aviation industry |
Freight industry
Define freight transport. The carriage of goods between an origin and a destination
What are the main modes of transport for freight? The freight industry is made up of privately
owned rail freight operating companies and road hauliers.
List the characteristics of freight transport
The demand for freight is a derived demand. Customer demand can vary at short notice.
Road haulage dominates freight transport in terms of volumes and value carried
International freight passes through UK ports, airports, or the Channel Tunnel
The fixed route rail network means the XED for rail transport with respect to the price of road
haulage is usually low and positive ie they are weak substitutes
Outline the characteristics of UK road haulage industry. Barriers to entry for local road haulage
are low. Small firms can enter local markets that are competitive with low profit margins.
At a national level, economies of scale mean road haulage is oligopolistic. Firms like DHL and TLT
maintain a fleet of lorries and depots carrying out contract logistics for manufacturers. High set up
costs for fleets of lorries and IT systems mean high barriers to entry
Define contract logistics. Manufacturers outsource of transport and distribution activities
Why move goods by rail? Moving bulk goods such as coal by rail also generates less negative
externalities than by road, especially over long distances
List the challenges facing rail freight operators. The Dept for Transport has responsibility for rail
freight in England. Network Rail decides which services can operate on a given route.
Freight and passenger trains operate on the same lines. Growth in both freight and passenger
markets has put increased pressure on network capacity resulting in peaking
Restricted rail capacity over some core UK freight routes causes peaking, If Network Rail
denies FOCs access to track, they are unable to deliver goods for its customers.
What are the likely effects on freight operators of a rise in operating costs? Increased operating
costs leads to a fall in supply. These cost increases may be passed on to other firms who may increase
the price of their products to customers or accept lower profits generating inflationary pressure.
How can government make freight transport more sustainable? Measures include:
improving information eg the DTIs Freight Best Practice web site
encouraging a switch from road to rail transport for the carriage of goods
allowing larger lorries to operate resulting in fewer journeys. One large lorry can carry more
freight than several small lorries. The amount of journeys, congestion and C02 emissions falls.
improving loading by reducing the numbers of partially laden vehicles Eg encourage firms to
make better use of spare capacity on the return leg of a delivery.
Offering advice on reducing fuel consumption by using routing software, driver training, etc
Tax incentives for using more environment friendly lorries eg lower VED
Has freight privatisation benefited the economy? Freight operators operate without subsidy in a
highly competitive market with intermodal competition from road haulage. The McNulty Report finds
freight unit costs fell by some 30% since privatisation denoting productive efficiency gains
| Freight industry
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Transport policies
Resource allocation and Government Transport Policy
What is a transport policy? A transport policy is a plan of action to achieve set objectives eg reducing
road congestion, encouraging sustainable transport; improving the economic efficiency of rail
How is the success of policy assessed? Policies such as road pricing, bus subsidies, franchising,
deregulation and privatisation are effective if the lead to
improved productive, allocative and dynamic efficiency
lower fares, increased in passengers and freight increasing consumer surplus
improved safety, punctuality, and sustainability eg reduced levels of negative externalities
How are resources allocated in transport? Privatisation means most transport operation resource
decisions are taken by the private sector. Infrastructure investment decisions are mainly taken by state
What is the impact of infrastructure projects? New roads, airports, etc
alter the relative cost of travel and so influences modal choices, traffic volumes, patterns of
land use, business location and the operation of labour markets.
Generate positive externalities eg new roads open up market and employment opportunities to
the benefit of third parties such as local businesses and workers.
Create regional multiplier effect: Investment in local transport infrastructure can be an initial
stimulus to regional economic development and generate a multiplier effect.
Give examples of transport investment. Capital items such as roads and rail networks, airports and
buses, rolling stock (trains) and aircraft are examples of transport investment
What are Public Private Partnerships? Public Private Partnerships (PPPs) are joint ventures
between private sector firms and government to finance build and operate infrastructure projects.
Give an example of a PPP in transport. A private sector firm financed, built and now operates the
M6 Toll motorway in return for the right to collect tolls from users until 2054.
What are the arguments for the PPP investment schemes? Private sector involvement means
Extra infrastructure is built. PPP schemes mean new transport infrastructure without state
borrowing or diverting expenditure from other areas of public spending such as education.
better use of scare resources. Profit maximising private sector firms have more
incentive to eliminate x-inefficiency than the public sector Eg penalty clauses act as an
incentive for firms to finish projects on time and within budget.
What are arguments against PPP investment schemes? Critics argue private sector firms in PPP:
make excessive supernormal profits operating infrastructure for each year of long contracts
can cease trading leaving government ultimate responsibility for operating projects
What is investment appraisal? Investment appraisal is the process of assessing the appropriateness
of a project eg a new road
How do private sector firms assess investment projects? Firms compare expected revenue with
expected costs. Generally, projects with the highest profitability are prioritised for investment. Unlike
public sector decisions, impacts on third parties are not considered in the appraisal process.
How does the public sector assess investment projects? By using investment appraisal techniques
which take account of externalities to identify social costs and benefits eg a Cost Benefit CBA, COBA
and new techniques such as Appraisal Summary Tables
Give an example of a failed PPP. Metronet won a 15.7Bn contract in 2003 to upgrade most of the
London Underground Tube network. Unexpected cost overruns saw Metronet go into administration
in 2007. A public sector corporation, Transport for London, now operates the tube. This means PPP do
not always transfer risk from government to the public sector.
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COBA
What is COBA? COBA (COst Benefit Analysis) is a decision making tool used by central government to
establish the net present value of a new road or road improvement scheme ie a type of CBA
Outline COBA methodology.
assumes a proposed road scheme has a working life
of 60 years
estimate the difference between what the situation
in the study area would be with (Do Something) and
without (Do Minimum) the road scheme.
estimates the monetary value of benefits (called
user cost changes) of the road scheme
estimates the total costs ie initial construction costs
and annual maintenance costs.
Uses discounting to establish present values of
benefits and costs
60 years of net benefits are discounted at a 6%
discount rate to establish net present value
What are user cost changes in COBA. COBA uses the
term user cost changes to describe the user benefits of a
road improvement scheme. User cost changes are the
monetary savings enjoyed by users of the improved highway eg from reduced journey times
List the benefits measured by COBA. A new or improved road usually causes:
time cost savings from reduced travel times for commuters, freight operators, etc.
vehicle operating cost savings as less congestion means less fuel consumption
accident costs savings from a reduction in the number and severity of accidents and lower damage
to property, insurance administration, and police time costs involved
How does COBA value time savings? COBA estimates an average money value of time for travelling
for work, commuting or non-work purposes. Average wages value work time while a lower figure is
used those commuting or travelling for non-work reasons. Eg for COBA the value of time per occupant
of a car, in working time, is 2.18 per hourvii.
How are vehicle operating cost savings calculated? COBA places an estimated monetary value on
the cost savings to users from the scheme eg using less fuel because of less congestion.
What are the issues involved in valuing accidents? The total cost of accidents on a road network is
calculated by multiplying the number of predicted accidents on the network by the cost per accident.
Not all accidents are equally serious. Accidents can result in damage to property, slight injury or death.
How can COBA be used to decide between competing projects? Given limited resources road
improvements with the highest positive net present value are undertaken first.
What is an appraisal? An appraisal is an assessment of a project undertaken at the planning stage
Outline New Approach to Road Appraisal (NARA) NARA is a decision making tool which estimates a
projects economic and environmental impact using an Appraisal Summary Table (AST)
What are Appraisal Summary Tables? An Appraisal Summary Tables (AST) is a one page tabular
summary assessing the impacts of a given transport project on five areas: the environment, safety,
economy, accessibility and integration. COBA is just one an element in a broader AST appraisal
process. AST assesse environmental impacts qualitatively eg a new road
Why is NARA needed? COBA is a narrowly focussed form of CBA which only assesses the safety and
economic impacts of projects to direct users of a road scheme. NARA is more comprehensive taking
into account other impacts eg environmental. COBA monetary valuations are used in ASTs alongside
qualitative indicators eg impact on biodiversity are summarised as moderate/slight/large; adverse or
beneficial or neutral
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COBA |
reduces journey times and lowers the cost of travelling for households and firms
switches demand from private transport to mass public transport so there will be less negative
externalities
How can transport be made more integrated? Integrating modes of transport requires better
coordination of the transport network through
better information systems eg signs at bus stops stating expected arrival time
coordinated timetables eg trains leave after and not before a scheduled bus arrival
improved ticketing arrangements eg the ability to buy one ticket, online, for a train journey
using several train operators
better interchanges well situated park and ride schemes with large enough car parks to meet
demand, cafes and covered bus stops
give public transport priority access to roads in urban areas at peak times eg bus lanes
How does smart ticketing enable integrated transport? Smart ticketing makes it easier for
consumers to switch between different modes of transport, eg bus rail and tube, for one journey.
Simplifying the purchase of tickets increases the demand for public transport.
Why does integrated transport require government action? Only the government has the ability to
ensure transport services are coordinated by
passing legislation requiring train and bus operators to coordinate their timetables
investing in infrastructure eg park and ride and roadside information screens.
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vii
http://www.dft.gov.uk/pgr/economics/software/cob
a11usermanual/part2thevalofcostsandb3154.pdf
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