Institutionnal • Transport economics
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What is the fundamental definition of economics?
Economics is the social science that studies how individuals, businesses, and societies decide to use limited resources to fulfill their endless wants. Central to economics is the concept of scarcity: resources are finite, yet people’s desires are limitless, forcing choices about production and consumption.
This field is split into two main branches:
- Macroeconomics: it looks at the broader economy, addressing issues like inflation, unemployment, and economic growth, and evaluating policies to foster stability and growth. Economics also explores various economic systems, such as capitalism and socialism, which differ in how they allocate resources and answer questions about production and distribution. Ultimately, economics equips us with tools to make informed choices in a world constrained by limited resources, shaping personal, business, and government decisions ;
- Microeconomics: it focuses on individual and business decisions, analyzing topics like supply, demand, and market structures, while examining how government interventions can address market failures. Microeconomics is the area of most interest to us here in the context of transport.
Transport economics
Because of its impact on regional development and the environment, and because of the scale of public investment involved, the transport sector is a major public policy issue in every country. However, understanding all the activities that make up the different modes of transport requires a discipline that provides the most effective concepts. In this respect,transport economics is essential, because it enables us to understand all the components of mobility: economic goods and services, supply, demand and exchange.
But transport economics goes further than this, revealing the immense diversity of the field and the many disciplines involved. Transport economics is not a separate discipline, nor is it simply one of a number of fields illustrating economics in general. It is characterised by the importance of space, the dual variable of transport and time, and by its applied nature, which is geared towards decision support. Transport, and the decisions that affect it, therefore interfere with other policies such as urban planning, spatial organisation, the environment and, of course, energy policy. The problems that arise in the transport sector are also strongly influenced by technological and societal developments in the different generations that make up our democratic societies.
Transport economics makes it possible to carry out forward-looking studies on changes in mobility needs and to construct long-term projections of transport demand in order to illustrate the trend in transport demand over various time horizons. This work is essential to ensure that public money is spent where it is most needed, in line with changes in society or, conversely, to consider frugal scenarios where necessary.
Transport economics is also a vast collection of data and statistics drawn from the various disciplines studied, including sociology and even the psychology of travellers. It is also a very important study of logistical flows and why we use one form of transport more than another.
Basics of microeconomics
1. Scarcity, choice and opportunity cost
- Microeconomic thought centers on how decision-makers allocate scarce resources with alternative uses. Consumers demand goods, producers supply them, but resources are limited, requiring trade-offs. Every choice has an opportunity cost: for instance, buying a car may has a significant cost for households and could encourage people not to take holidays or to postpone other expenses. This is the principle of compromise. Similarly, firms face production decisions, constrained by diminishing returns from additional resource use.
2. Efficiency and equity
- Efficiency: Economic efficiency is a measure of how well a market or the firms within it are performing. There are various different aspects of efficiency. Production efficiency (also referred to as technical efficiency) occurs when a firm produces a given output at the lowest unit cost of production given the technology employed.
- Equity: Economic equity ensures fair and just distribution of wealth, income, and economic resources across society, focusing on reducing disparities. It promotes policies that allocate resources based on individuals’ needs, contributions, and efforts, rather than strict equality. Rooted in social and economic justice, economic equity strives to offer equal opportunities for education, work, housing, and healthcare. This concept also aims to distribute both the benefits and burdens of economic activities fairly, ensuring a balanced economic environment for all.
3. Demand function: marginal benefits
- In economics, “goods” broadly include everything satisfying human needs, encompassing services like transport. Consumers choose whether to use such services, and sometimes producers and consumers overlap, such as a driver using their car for a trip. People buy goods for the utility they provide, reflecting their willingness to pay. This perceived value, or benefit, is best expressed monetarily, allowing comparisons. Individual demand functions show how much of a good a person will buy at each price, representing marginal benefits, with collective demand calculated by summing individual demands.
4. Supply function: marginal costs
- Production of goods and services uses resources like raw materials, time, space, and energy, which are unavailable for other uses. Production costs are the value of the best alternative use of these resources, typically measured in monetary units for simplicity, as with consumer benefits. Economic theory differentiates between short-run and long-run analysis. In the short run, capital goods remain constant, limiting production capacity; output varies only by adjusting variable factors. In the long run, all production factors, including capital, are variable.
5. Structure of the Market
Market structure is determined by various aspects, such as the number of buyers and sellers in the market, the distribution of market shares between them, and how convenient it is for the companies to enter and leave the market.
- Pure competition: it is a market structure in which numerous small firms compete against each other. The demand and supply determine the quantity of the commodities produced and the market prices. The firms cannot influence the prices, and the commodities produced by all the firms are identical.
- Monopoly: in such a monopolistic market structure, there is a single company controlling the supply in the entire market. As there are no substitutes, the company reduces the quantity supplied, increases the price, and earns considerable profits.
- Oligopoly: in an oligopoly, a few companies control the entire market. The companies can either compete or collaborate to raise prices and earn more profits.
- Monopsony: a monopsony exists when only one buyer is controlling the demand for commodities, whereas there are many sellers in the market.
- Oligopsony: an oligopsony exists when there are only a small number of buyers but many sellers. In such a market, the buyers exert more power than sellers, unlike oligopoly, where sellers control the market.
6. Market intervention
- In capitalist systems, free markets are valued, but certain goods and services—like law, order, and defense—are better provided with intervention. Governments may fix prices to ensure essential resources are accessible. For example, a maximum price below equilibrium protects consumers but can create shortages and illegal markets, as seen in the UK during World War II. Conversely, a minimum price, like the EU’s agricultural policy, supports producers but often leads to surpluses. Such interventions bring trade-offs society must manage.
Specification of transport markets
1. Demand and Supply of Transport
- Demand for Transport: The need or desire for transport services, often measured by volume (e.g., passenger-kilometers or ton-kilometers).
- Supply of Transport: The availability of transport infrastructure and services to meet demand, influenced by capacity, investment, and technological advancements.
2. Elasticity of Demand
- Price Elasticity: Measures how sensitive the demand for transport is to changes in price (e.g., fares, fuel costs).
- Income Elasticity: Measures how demand varies with changes in income levels, crucial in determining how economic growth affects transport usage.
3. Costs in Transport Economics
- Fixed Costs: Costs that do not change with the level of output, such as infrastructure investment and maintenance.
- Variable Costs: Costs that vary directly with the volume of transport activity, like fuel and labor.
- Marginal Cost: The cost of transporting one additional unit (e.g., an extra passenger or ton), critical for pricing and investment decisions.
- Total Cost: The sum of fixed and variable costs across a transport operation.
4. Economies of Scale and Scope
- Economies of Scale: Cost advantages that arise as the volume of transport services increases, usually due to spreading fixed costs over a larger output.
- Economies of Scope: Cost savings when a single provider offers multiple transport services (e.g., a logistics company providing both rail and road freight).
5. Externalities
- Positive Externalities: Benefits generated by transport that are not reflected in the market price, such as economic growth and accessibility.
- Negative Externalities: Unintended negative impacts, including pollution, congestion, and accidents, which are often not accounted for in transport pricing.
6. Cost-Benefit Analysis (CBA)
- A framework used to assess the economic viability of transport projects by comparing the costs (e.g., construction, environmental impact) and benefits (e.g., time savings, increased productivity).
7. Pricing and Tariff Models
- Marginal Cost Pricing: Pricing based on the cost of transporting an additional unit, aimed at achieving economic efficiency.
- Congestion Pricing: Charging fees based on traffic levels to reduce congestion and optimize road usage.
- Fare Structures: Various ways of setting ticket prices, such as distance-based fares, flat rates, or peak/off-peak pricing.
8. Network Effects and Connectivity
- Network Effects: The added value of each user in a transport network as more users join (e.g., more airline routes).
- Connectivity: The degree to which locations are interconnected, affecting the efficiency and accessibility of the transport system.
9. Investment and Infrastructure Financing
- Public-Private Partnerships (PPP): Collaboration between government and private companies to fund, build, and operate transport projects.
- Infrastructure Financing: Various methods for funding large transport projects, including government funding, tolls, or bonds.
10. Sustainability and Environmental Impact
- Sustainable Transport: A transport system that meets current mobility needs without compromising future generations, considering emissions, energy use, and social impact.
- Decarbonization: Efforts to reduce carbon emissions, often through electric vehicles, fuel efficiency, or modal shift to public transport.
11. Modal Split and Modal Choice
- Modal Split: The distribution of transport demand across different modes (e.g., cars, buses, trains).
- Modal Choice: Factors influencing the choice of transport mode, such as cost, convenience, and environmental impact.
12. Logistics and Freight Economics
- Supply Chain: The flow of goods from production to consumption, where transport plays a key role in efficiency and cost.
- Intermodal Transport: The use of multiple modes in a single journey (e.g., combining truck, rail, and ship for freight), aiming to optimize costs and time.
13. Accessibility and Mobility
- Accessibility: The ease with which people can reach desired locations, often influenced by transport options and network coverage.
- Mobility: The movement capability within a transport network, central to urban planning and public transport systems.
14. Transport Policy and Regulation
- Transport Policy: Government strategies and rules for planning, funding, and managing transport systems.
- Regulation: Rules governing safety, pricing, emissions, and competition within transport industries.
- Competition: Competition in the rail market can take two forms: open-access (OA) competition (competition-in-the-market) and Public Service Obligation (PSO) contracts through competitive tendering (competition-for-the-market). Freight rail is almost exclusively organised through open-access competition, while competition in the passenger railway market is organised through both types. This page explains the different types of competition and the results. ➤ See details
These terms provide an essential basis for the economic analysis of transport, enabling us to understand the costs, benefits and impacts of transport on society and the environment. 🟧
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Institutionnal • Transport economics • Lexical