Transport economics

Transport economics

Transport economics is a branch of economics that deals with the allocation of resources within the transport sector and has strong linkages with civil engineering. Transport economics differs from some other branches of economics in that the assumption of a spaceless, instantaneous economy does not hold. People and goods flow over networks at certain speeds. Demands peak. Advanced ticket purchase is often induced by lower fares. The networks themselves may or may not be competitive. A single trip (the final good from the point-of-view of the consumer) may require bundling the services provided by several firms, agencies and modes.

Although transport systems follow the same supply and demand theory as other industries, the complications of network effects and choices between non-similar goods (e.g. car and bus travel) make estimating the demand for transportation facilities difficult. The development of models to estimate the likely choices between the non-similar goods involved in transport decisions (discrete choice models) led to the development of an important branch of econometrics, and a Nobel Prize for Daniel McFadden.

In transport, demand can be measured in numbers of journeys made or in total distance travelled across all journeys (e.g. passenger-kilometres for public transport or vehicle-kilometres of travel (VKT) for private transport). Supply is considered to be a measure of capacity. The price of the good (travel) is measured using the generalised cost of travel, which includes both money and time expenditure.

The effect of increases in supply (capacity) are of particular interest in transport economics (see induced demand), as the potential environmental consequences are significant (see "externalities" below).


In addition to providing benefits to their users, transport networks impose both positive and negative externalities on non-users. The consideration of these externalities - particularly the negative ones - is a part of transport economics.

Positive externalities of transport networks may include the ability to provide emergency services, increases in land value and agglomeration benefits. Negative externalities are wide-ranging and may include local air pollution, noise pollution, light pollution, safety hazards, community severance and congestion. The contribution of transport systems to potentially hazardous climate change is a significant negative externality which is difficult to evaluate quantitatively, making it difficult (but not impossible) to include in transport economics-based research and analysis.

Congestion is considered a negative externality by economists. [Citation | last = Small | first = Kenneth A. | last2 = José A. Gomez-Ibañez | year = 1998 | title = Road Pricing for Congestion Management: The Transition from Theory to Policy| publisher = The University of California Transportation Center, University of California at Berkeley| id =| pages = 213 ] An externality occurs when a transaction causes costs or benefits to third party, often, although not necessarily, from the use of a public good. For example, manufacturing or transportation cause air pollution imposing costs on others when making use of public air.

Traffic Congestion

Traffic congestion is a negative externality caused by various factors. A 2005 American study stated that there are seven root causes of congestion, and gives the following summary of their contributions: bottlenecks 40%, traffic incidents 25%, bad weather 15%, work zones 10%, poor signal timing 5%, and special events/other 5%. [cite web|title=Traffic Congestion and Reliability: Trends and Advanced Strategies for Congestion Mitigation|date=2005-09-01|url=|publisher=U.S. Federal Highway Administration|accessdate=2008-02-28] Within the transport economics community, congestion pricing is considered to be an appropriate mechanism to deal with this problem (i.e. to internalise the externality) by allocating scarce roadway capacity to users. Capacity expansion is also a potential mechanism to deal with traffic congestion, but is often undesirable (particularly in urban areas) and sometimes has questionable benefits (see induced demand). William Vickrey, winner of the 1996 Nobel Prize for his work on "moral hazard", is considered one of the fathers of congestion pricing, as he first proposed it for the New York City subway system in 1952. [Cite web|author= Vickrey, William | year=1992|url=|title= Principles of Efficient Congestion Pricing|accessdate=2008-02-26|publisher = Victoria Transport Policy Institute] In the road transportation arena these theories were extended by Maurice Allais, a fellow Nobel prize winner "for his pioneering contributions to the theory of markets and efficient utilization of resources", Gabriel Roth who was instrumental in the first designs and upon whose World Bank recommendation [Citation | last = Walters | first = A. A. | year = 1968 | title = The Economics of Road User Charges| publisher = World Bank Staff Occasional Papers Number Five, Chapter VII, Washington, D.C. pp. 191-217| id = ISBN 978-0801806537] the first system was put in place in Singapore. Reuben Smeed, the deputy director of the Transport and Road Research Laboratory was also a pioneer in this field, and his ideas were presented to the British government in what is known as the Smeed Report. [cite book |last=Smeed, |first=R.J. |year=1964 |title=Road pricing: the economic and technical possibilities |publisher=HMSO]

Congestion is not limited to road networks; the negative externality imposed by congestion is also important in busy public transport networks as well as crowded pedestrian areas.

Congestion pricing

Congestion pricing is an efficiency pricing strategy that requires the users to pay more for that public good, thus increasing the welfare gain or net benefit for society. [Citation | last = Button | first = Kenneth J. | year = 1993 | title = op. cit.| pages = 153] [Citation| last = Small, Kenneth A.; Verhoef, Erik T. | title = op. cit| year = 2007| pages = 120] Congestion pricing is one of a number of alternative demand side (as opposed to supply side) strategies offered by economists to address congestion.cite journal |title=Congestion Control and Demand Management |author=Sheldon G. Strickland and Wayne Ber |date=Winter 1995 |volume=58 |issue=3 |journal=Public Roads Magazine |publisher=U.S. Federal Highway Administration |url= |accessdate=2008-02-28] Congestion pricing was first implemented in Singapore in 1975, together with a comprehensive package of road pricing measures, stringent car ownership rules and improvements in mass transit. [Citation | last = Small, Kenneth A.; Verhoef, Erik T. | year = 2007 | title = The Economics of Urban Transportation | publisher = Routledge, England| id = ISBN 978-0-415-28515-5 | pages = 148 ] [cite web | url= | title=Road pricing Singapore's experience | author = Chin Kian Keong | date=2002-10-23 | publisher = Third Seminar of the IMPRINT-EUROPE Thematic Network: “Implementing Reform on Transport Pricing: Constraints and solutions: learning from best practice” | accessdate=2008-04-16| language= Inglés] Thanks to technological advances in electronic toll collection, Singapore upgraded its system in 1998 [cite web | url= | title= Electronic Road Pricing | author = | date= | publisher = Land Transport Authority (Singapore). Website oficial | accessdate=2008-04-16| language= Inglés] (see Singapore's Electronic Road Pricing). Similar pricing schemes were implemented in Rome in 2001, as an upgrade to the manual zone control system implemented in 1998; [cite web | url= | title=Road Charging Scheme: Europe - Italy, Rome | author = | date= | publisher = UK Commission for Integrated Transport | accessdate=2008-04-16| language= ] [cite web | url= | title=The history of Limited Access Zones in Rome | author = | date= | publisher = PRoGR€SS Project | accessdate=2008-04-16| language= ]
London in 2003 and extended in 2007 (see London congestion charge); Stockholm in 2006, as seven month trial, and then on a permanent basis since August 2007 [cite web | url= | title=Congestion tax in Stockholm | author = | date=2007-08-21 | publisher = Swedish Road Administration | accessdate=2008-04-16| language= ] (see Stockholm congestion tax); and since January 2008, Milan introduced a congestion pricing scheme as a one-year trial, called "Ecopass", and exempts low-polluting cars (Euro IV). [cite web | url= | title=Toll Discounts for Going Green | author = Ken Belson | date=2008-01-27 | publisher =The New York Times | accessdate=2008-01-27| language= ] [cite web | url= | title=Milan introduces traffic charge | author = | date=2008-03-02 | publisher = BBC News | accessdate=2008-01-17| language= ] [cite web | url= | title= Milan Introduces Congestion Charge To Cut Pollution | author = Marco Bertacche | date=2008-01-03 | publisher = The New York Sun | accessdate=2008-01-17| language= ]

Even the transport economists who advocate congestion pricing have anticipated several practical limitations, concerns and controversial issues regarding the actual implementation of this policy. As summarized by Cervero: [Citation | last = Cervero | first = Robert | year = 1998 | title = The Transit Metropolis | publisher = Island Press, Washington, D.C. | id = ISBN 1-55963-591-6 "Setting the prices right"| pages = 67–68] "True social-cost pricing of metropolitan travel has proven to be a theoretical ideal that so far has eluded real-world implementation. The primary obstacle is that except for professors of transportation economics and a cadre of vocal environmentalists, few people are in favor of considerably higher charges for peak-period travel. Middle-class motorists often complain they already pay too much in gasoline taxes and registration fees to drive their cars, and that to pay more during congested periods would add insult to injury. In the United States, few politicians are willing to champion the cause of congestion pricing in fear of reprisal from their constituents... Critics also argue that charging more to drive is elitist policy, pricing the poor off of roads so that the wealthy can moveabout unencumbered. It is for all these reasons that peak-periord pricing remains a pipe dream in the minds of many."

Road space rationing

Transport economists consider road space rationing an alternative to congestion pricing, but road space rationing is considered more equitable, as the restrictions force all drivers to reduce auto travel, while congestion pricing restrains less those who can afford paying the congestion charge. Nevertheless, high-income users can avoid the restrictions by owning a second car. [cite web| author= Victoria Transport Policy Institute| url= |title=Vehicle Restrictions. Limiting Automobile Travel At Certain Times and Places |publisher= TDM Encyclopedia|accessdate=2008-04-09|language= See Equity Impacts section] Road space rationing based on license numbers has been implemented in cities such as Athens (1982), [cite web| url= |title=LEDA Measure: License plate based traffic restrictions, Athens, Greece |publisher= LEDA database|accessdate=2008-04-09|language= ] México City (1989), São Paulo (1997), Santiago, Chile, Bogotá, Colombia, La Paz (2003) [cite web| url= |title= Los choferes públicos acataron la restricción| author= | date=2003-01-07 | publisher= La Prensa | accessdate=2008-04-09 | language=Spanish ] , Bolivia, San José (2005), [cite web| url= |title=Hoy empieza restricción para autos en centro de San José | author= Ángela Ávalos | date=2005-08-03 | publisher= La Nación | accessdate=2008-04-08 | language=Spanish] [cite web| url= |title= Evaluarán restricción vehicular en capital | author= Mercedes Agüero | date=2006-04-12 | publisher= La Nación | accessdate=2008-04-08 | language=Spanish ] Costa Rica, and countrywide in Honduras (2008) [cite web| url= |title= Unos 39.000 vehículos dejan de circular en Honduras para ahorrar petróleo | author= | date= 2007-04-07| publisher= La Nación | accessdate=2008-04-09 | language=Spanish ] .

Tradable mobility credits

A more acceptable policy on automobile travel restrictions, proposed by transport economists [Cite web | author = Verhoef E, Nijkamp P, Rietveld P | url = | date = 1997 | title = Tradeable permits: their potential in the regulation of road transport externalities | publisher = Environment and Planning B: Planning and Design 24(4) 527 – 548 |accessdate=2008-04-11 |language=] to avoid inequality and revenue allocation issues, is to implement a rationing of peak period travel but through revenue-neutral credit-based congestion pricing. This concept is similar to the existing system of emissions trading of carbon credits, proposed by the Kyoto Protocol to curb greenhouse emissions. Metropolitan area or city residents, or the taxpayers, will have the option to use the local government-issued mobility rights or congestion credits for themselves, or to trade or sell them to anyone willing to continue traveling by automobile beyond the personal quota. This trading system will allow direct benefits to be accrued by those users shifting to public transportation or by those reducing their peak-hour travel rather than the government. [Cite web | author = José M. Viegas | url = | date = 2001 | title = Making urban road pricing acceptable and effective: searching for quality and equity in urban mobility | publisher = Transport Policy, Vol 8, Issue 4, October 2001, pp. 289-294 |accessdate=2008-04-11 |language=] [Cite web | author = Kara M. Kockelman and Sukumar Kalmanje | url = | date = 2005 | title = Credit-based congestion pricing: a policy proposal and the public’s response| publisher = Transportation Research Part A: Policy and Practice, Vol. 39, Issues 7-9, August-November 2005, pp. 671-690 |accessdate=2008-04-11 |language=]

Funding & financing

Methods of funding and financing transport network maintenance, improvement and expansion are debated extensively and form part of the transport economics field.

Funding issues relate to the ways in which money is raised for the supply of transport capacity. Taxation and user fees are the main methods of fund-raising. Taxation may be general (e.g. income tax), local (e.g. sales tax or land value tax) or variable (e.g. fuel tax), and user fees may be tolls, congestion charges or fares). The method of funding often attracts strong political and public debate.

Financing issues relate to the way in which these funds are used to pay for the supply of transport. Loans, bonds, public-private partnerships and concessions are all methods of financing transport investment.

Regulation & competition

Regulation of the supply of transport capacity relates to both safety regulation and economic regulation. Transport economics considers issues of the economic regulation of the supply of transport, particularly in relation to whether transport services and networks are provided by the public sector (i.e. socially), by the private sector (i.e. competitively) or using a mixture of both.

Transport networks and services can take on any combination of regulated/deregulated and public/private provision. For example, bus services in the UK outside London are provided by both the public and private sectors in a deregulated economic environment (where no-one specifies which services are to be provided, so the provision of services is influenced by the market), whereas bus services within London are provided by the private sector in a regulated economic environment (where the public sector specifies the services to be provided and the private sector competes for the right to supply those services - i.e. franchising).

The regulation of public transport is often designed to achieve some social, geographic and temporal equity as market forces might otherwise lead to services being limited to the most popular travel times along the most densely settled corridors of development. National, regional or municipal taxes are often deployed to provide a network that is socially acceptable (e.g. extending timetables through the daytime, weekend, holiday or evening periods and intensifying the mesh of routes beyond that which a lightly regulated market would probably provide).

Franchising may be used to create a supply of transport that balances the free-market supply outcome and the most socially desirable supply outcome.

Project appraisal and evaluation

The most sophisticated methods of project appraisal and evaluation have been developed and applied in the transport sector. It should be noted that the terms 'appraisal' and 'evaluation' are often confused in relation to the assessment of projects. Appraisal refers to "ex ante" (before the event) assessment and evaluation refers to "ex post" (after the event) assessment. [cite web |title=Green Book, Appraisal and evaluation in central government |url= |publisher=HM Treasury 2003]


The appraisal of changes in the transport network is one of the most important applications of transport economics. In order to make an assessment of whether any given transport project should be carried out, transport economics can be used to compare the costs of the project with its benefits (both social and financial). Such an assessment is known as a cost-benefit analysis, and is usually a fundamental piece of information for decision-makers, as it places a value on the net benefits (or disbenefits) of schemes and generates a ratio of benefits to costs which may be used to prioritise projects when funding is constrained.

A primary difficulty in project appraisal is the valuation of time. Travel time savings are often cited as a key benefit of transport projects, but people in different occupations, carrying out different activities and in different social classes value time differently.

Appraising projects on the basis of their supposed reductions in travel times has come under scrutiny in recent years with the recognition that improvements in capacity generate trips that would not have been made (induced demand), partially eroding the benefits of reduced travel times. Therefore an alternative method of appraisal is to measure changes in land value and consumer benefits from a transport project rather than the measuring benefits accruing to travellers themselves. However, this method of analysis is much more difficult to carry out.

Another problem is that many transport projects have impacts that cannot be expressed in monetary terms, such as impacts on, for example, local air quality, biodiversity and community severance. Whilst these impacts can be included in a detailed environmental impact assessment, a key issue has been how to present these assessments alongside estimates of those costs and benefits that can be expressed in monetary terms. Recent developments in transport appraisal practice in some European countries have seen the application of multi-criteria decision analysis based decision support tools. These build on existing cost-benefit analysis and environmental impact assessment techniques and help decision makers weigh up the monetary and non-monetary impacts of transport projects. In the UK, one such application, the New Approach to Appraisal has become a cornerstone of UK transport appraisal.


The evaluation of projects enables decision makers to understand whether the benefits and costs that were estimated in the appraisal materialised. Successful project evaluation requires that the necessary data to carry out the evaluation is specified in advance of carrying out the appraisal.

The appraisal and evaluation of projects form stages within a broader policy making cycle that includes:
* identifying a rationale for a project
* specifying objectives
* appraisal
* monitoring implementation of a project
* evaluation
* feedback to inform future projects.


See also

* Congestion pricing
* Infrastructure
* Transport finance
* Road pricing
* Road space rationing
* Vignette (road tax)
* Transport economics
* List of economics topics

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