1 Transport, Transport Trends and the Economy (10%)

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2 1 Transport, Transport Trends and the Economy (10%) What is transport economics? Transport refers to the movement of people and goods between destinations. Transport economics studies the allocation of resources used to move passengers and freight from place to place Transport modes? A transport mode is a method of moving passengers or freight. The main transport modes are road, rail, sea, air and pipelines How is transport usage measured? What is the importance of transport to the economy? Why is freight transport important? What is infrastructure? Transport infrastructure is? Types of transport infrastructure Why is transport infrastructure important? Explain transport operations The role of the public sector in transport operations? Passenger transport is the movement of people from one place to another and is measured in billion passenger kilometres. Freight transport is the movement of raw materials, components and finished products and is measured in billion tonne kilometres Transport systems increase the potential size of the market by enabling domestic goods to be sold globally. Workers become more mobile and can live many miles from work and commute. Hence transports create mass markets based on extensive use of specialisation. Large scale production and associated economies of scale lower unit costs and enhance opportunities for international trade and the benefits or economic integration based on comparative advantage Modern transport systems enable Just in Time (JIT) production techniques. Components are delivered when needed reducing a firm s stock levels hence unit costs Just in time delivery substantially reduces working capital tied up in stocks. Firms rely on their suppliers ability to meet their needs when required. Infrastructure is the stock of capital used to support the economic system. An economy needs an underlying stock of capital items (infrastructure) to enable economic activity eg telecommunications eg cables and satellites to enable web access A country s transport infrastructure is made up of past investment in the roads & rail networks, airports & docks, etc that enable the movement of goods and people. There are two aspect of transport infrastructure items needed to move freight and people over a distance: Transport networks categorised by mode eg the rail network is made up of train track, tunnels and signalling systems Transport nodes or terminals where journeys begin or end eg airports, docks and railway station The transport infrastructure generates positive externalities. Investment in local transport infrastructure can be an initial stimulus to regional economic development and generate a multiplier effect. For example roads open up market and employment opportunities, to the benefit of third parties such as local businesses and workers. Infrastructure changes affect the cost of travel and so influence travel patterns and traffic volumes; patterns of land use the operation of labour markets and the location and organisation of business. Transport operations are decisions about transport mode types to use or provide. Demand side decisions by consumers and firms concern what journey to make, by what mode, and at what time. Supply side involves firms deciding what transport services to offer. The privatisation of nationalised bus & rail operators means most supply side operational decisions are increasingly taken by profit maximising private sector bus companies and train operators. Government still plays an indirect role by appointing regulators, such as Office of the Rail Regulator (ORR), to monitor private sector transport operators Train Operating like Virgin Rail. On average, in the UK, we make nearly 3 trips per day, travelling for 60 minutes per day and covering 10.7 kilometres. This means that we spend some 4% of our lives travelling. CfIT Infrastructure enables growth Efficient transport systems minimise travel times and so lower domestic unit costs and so improve UK competitiveness. Transport accounts for around 15% of UK economic activity in terms of GDP. Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 8

3 What is the Department for Transport How do economists judge the performance of transport operators? What are the main characteristics of transport? What are the advantages and disadvantages of a given mode or transport? How does transport contribute to social exclusion? The Department for Transport (DfT) determines overall transport strategy and manage relationships with the agencies such as the Highways Agency responsible for the delivery of that vision. Evaluation of performance requires the identification and monitoring of indicators. Potential performance indicators include Fares & profits. An increase in fares and abnormal profits are indicators of poor performance Subsidies: ie the amount a public service obligation to operators to subsidise essential loss making services Performance: eg loading, number of commuters, punctuality of services, number of complaints Quality of service: eg degree of overcrowding; the number of services, service frequency Safety: eg numbers of accidents per billion passenger kilometres The demand for transport is derived (got) from the demand for what travelling makes possible eg commuting. Transport is a service consumed immediately and cannot be stored usually an intermediate output ie a stage in the process of creating products has a distance and a time dimension. All trips are made over a particular distance; between start and end destinations; and for a given duration of time; at different times of the day (peak and off peak); at different seasons eg summer or winter Transport generates externalities causing market failure because the price of transport does not always reflect the full social cost to society. Eg airlines generate significant negative externalities such as noise, pollution and congestion. To assess the advantages and disadvantages of a given mode or transport, consider relative: Characteristics including distance, nature of item and urgency of the journey, balance between fixed and variable costs Externalities generated by a given mode Equity issues eg high cost of car ownership and high price of rail excludes low income groups Poor transport contributes to social exclusion in two ways. First, it restricts access to activities that enhance people's life chances, such as work, learning, health care, food shopping, and other key activities. Second, deprived communities suffer disproportionately from pedestrian deaths, pollution and the isolation which can result from living near busy roads. The government pays a public service obligation to TOCs and bus operators to subsidise essential loss making services. 27% of households and 60% of disabled people have no car Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 9

4 1.2 Demand for Transport What is the demand for transport? What factors affect the demand for transport? Explain derived demand The demand for transport refers to the amount of journeys undertaken at various prices, in a given time period. Transport demand Can be by passengers travelling between A and B or firms moving freight. Is a derived demand ie got from the demand for what travelling makes possible The quantity of transport demanded is dependent on a range of factors: The price of a journey eg price of petrol, or rail fare Price of substitutes eg coach or rail fare from Oxford to London Price of complements eg price of new cars and petrol Income eg low income households cannot afford a car and rely more on public transport such as buses Consumer taste eg is public transport uncomfortable and unreliable? Time how long will a journey by a given transport mode take? For example the demand for international air transport is affected by UK GDP, world GDP, airfares, and exchange rates. Transport is not usually consumed for its own sake. The demand for transport is derived (got) from the demand for what travelling makes possible eg commuting to work shopping trips, holiday visits; firms moving final goods and components between locations. Understanding ceteris paribus (cet par) is the key to understanding microeconomics. Many factors affect transport demand. Economists assume all factors are held constant ie do not change except one price. A change in a factor being held constant invalidates the cet par assumption Illustrate off peak and peak time demand Peak time refers to hours immediately before the start and after the end of work hours when most workers commute ie rush hours and is when the demand for transport is at its highest. Peaking and congestion result Note that the peak time demand curve is further to the right and more prince inelastic than off peak. Peak and off peak travel are weak substitutes. Where consumers have to be at work by 09 00, off peak travel is not a substitute good. Their cross elasticity of demand coefficient is low & positive, Price s Off Peak Demand Peak Demand Journeys Many haulage journeys could take place in off peak periods. School runs contribute to rush hour peaking What is peaking? Peaking occurs when demand exceeds supply on a given network at a given time causing congestion eg rush hours & bank holidays Congestion is? Congestion is when demand exceeds supply on a given network at a given period in time eg bank holiday on holiday routes What is loading? Loading: the percentage of capacity utilised in a journey. Eg a loading factor of 80% means 20% of seats or space is unused in a journey Also called load factor Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 10

5 1.2.8 Why has the demand for road transport risen particularly sharply? Why have petrol prices increased displayed volatility? 1.3 Elasticity & Transport Consumer behaviour changes have increased demand for car travel: Workers commute longer distances; Out of town shopping centres encourage road usage; More pupils taken by car in the school run; The price of new cars has fallen following government fair trade investigations stimulating demand. A cartel, OPEC, largely control the supply of oil for refinement into petrol. Changes in supply shift the supply curve along a highly price inelastic demand curve resulting in significant price fluctuations. The demand for oil and petrol linked to world trade cycle The real cost of motoring has fallen Petrol prices are volatile for two main reasons: What is the difference between qualitative & quantitative analysis What is the concept of elasticity Why is elasticity an important concept? How are percentage changes in a variable calculated What are the main types of elasticity? Qualitative analysis uses words to predict the effect of a change eg: A fall in price results in an increase in quantity demanded A proposed new bypass is likely to have a large negative impact on the environment Quantitative analysis places a number value on a given change eg: A 10% fall in price results in a 5% increase in quantity demanded The negative impact on the environment of a proposed new bypass is estimated at 20m Elasticity measures sensitivity or responsiveness specifically how one variable responds to a change in a second variable. Inelastic means unresponsive, ie a change in one variable results in a smaller change in a second Elastic means responsive, ie a change in one variable results in a bigger change in a second Elasticity is a key quantitative tool in microeconomics that is used extensively to assess and predict the effect of a change in one variable eg price, on a second variable eg quantity demanded. In short, elasticity quantifies changes. The ability to calculate elasticity values requires the ability to calculate the change in a variable in percentage terms. To calculate a percentage change (% )in a variable X use the equation : % X = (new X old X) / old X x 100 where X is the variable such as price or quantity demanded. Price elasticity of demand the responsiveness of demand to a given change in price Income elasticity of demand measures the responsiveness of demand to a given change in income Price elasticity of supply measures the responsiveness of supply to a given change in price Cross elasticity of demand measures the responsiveness of demand for good A to a given change in price of good B Transport economics is a context in which to apply at AS Microeconomic concepts The number one determinant of PED for transport is the availability of substitutes Students can have problems estimating percentage changes. Practice! Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 11

6 1.3.6 How can transport operators make use of PED? How can transport operators make use of YED? How can firms make use of XED? Firms can use price elasticity of demand (PED) estimates in transport to predict: The effect of a change in fares on quantity demanded The effect of a change in fares on total revenue & expenditure The effect of a change in indirect tax eg road charging or fuel duty on price and quantity demanded The effects of price discrimination in peak/off peak. Price discrimination is where a monopolist charges different prices for the same product to different segments of the market eg peak and off peak rail travel Firms and government use income elasticity of demand (YED) estimates to predict impact on demand and revenues of: Economic growth the demand for luxury items such as air travel (high positive YED) increases more than products with a low YED such as bus travel The business cycle ie boom & recession the fluctuations in the demand for rail air buses etc can be estimated Cross elasticity of demand (XED) estimates predict the impact of a rival s pricing strategies on demand for their own products. If a competitor cuts price, firms use XED to predict the effect on the quantity demanded and total revenue of their own product Analyse the impact of elasticity on transport on each mode of transport Table: Car Elasticities Variable With respect to Short run Long run Petrol Petrol price to 0.8 consumption Car traffic Petrol price Petrol consumption Income 0.35 to to 1.3 The elasticity value will vary depending on whether travel is at peak or off peak and the availability of substitutes Road rail and air travel have high positive income elasticity of demand (YED). Economic growth is resulting in a proportionately greater increase in the use of these modes of transport Note in the Car Elasticities Table that: Elasticities are an estimate The estimates are within a range Car traffic Income 1.1 to 1.8 Source: Glaister and Graham (2000) Elasticities for transport modes are? How do economic growth rates influence demand for transport? Buses exhibit low, even negative YED, and are mainly used by low income consumers. Road and public transport are weak substitutes for commuters. Indicator: low, positive, cross elasticity value Economic growth raises incomes. Given the high positive YED for cars, a given economic growth rate results in a proportionately larger increase in car usage. Note increased car usage is: A result of increased prosperity and the preferences of consumers Unsustainable because of resultant congestion and environmental impacts from pollution Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 12

7 1.4 Recent Trends in Transport Usage See for 2005 figures and commentary Outline recent passenger transport usage trends Comment on distance travelled and GDP Passenger travel by mode: car and other modes billion passenger kilometres Car van or taxi Bus & coach Motor cycle Bicycle All Road Rail Air Total Data & commentary source: Source Dept for Transport Trends 2005 Index (1980=100) Traffic Passenger & GDP Vehicle Passenger GDP Total traffic increased by 81 per cent between 1980 and 2004, from 277 to 502 billion vehicle kilometres. Most of this growth occurred between 1980 and 1990; since 1990 traffic has increased by 21 per cent. Car traffic has risen by 85 per cent since 1980, from 215 to 398 billion vehicle kilometres Light van traffic has more than doubled since 1980, from 26 to 61 billion vehicle kilometres. The distance travelled by heavy goods vehicles has also increased from 20 to 29 billion vehicle kilometres, a rise of 49 per cent since Bus and coach traffic also increased by 49 per cent, from 3.5 to 5.2 billion vehicle kilometres. Pedal cycle traffic fell by nearly 40 per cent between 1984 and It rose between 2000 and 2003 but fell sharply in Between 1980 and 1992, traffic (measured in vehicle kilometres) and overall travel (measured in passenger kilometres) grew at a faster rate than GDP. Since 1992 GDP has increased by 42 per cent compared with rises in road traffic and overall travel of 21 per cent and 16 per cent respectively. Since 1992 there had been some uncoupling of traffic and travel growth from economic growth. Commentary & Data Source Department for Transport Trend 1.2a : Traffic, passenger kilometres and GDP Car use has continued to increase as disposable income has risen, with little change in the real cost of motoring and rising real costs of public transport fares. While the average time people spend travelling has hardly changed, at around one hour per day, increased car use has allowed them to travel further in the same time Year Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 13

8 1.4.3 Has the real cost of travelling changed in the last 20 years? Trend 2.6: Changes in the real cost of transport & in income: 1980 to 2004 index 1980 = 100 Disposable income Rail fares Bus & coach fares Petrol/oil Source Dept for Transport Trends 2005 All motoring The growth in car travel and the fall in bus patronage since 1980 have been accompanied by a slight reduction in motoring costs and rising bus fares in real terms. The overall cost of motoring (including purchase, maintenance, petrol and oil, and tax and insurance) has remained at or below its 1980 level in real terms, although the real cost of fuel is now 10 per cent higher than in 1980, despite falling by 8 per cent since In contrast to overall motoring costs, public transport fares have risen in real terms since In 2004, both bus and coach fares and rail fares were 37 per cent higher than in Over the same period, average disposable income has gone up more than 95 per cent in real terms. Transport by any mode has therefore become more affordable, with a greater improvement in the affordability of car use than that of public transport. The CfIT predicts the cost of car ownership is set to fall by 20% and public fares rise by 20% over the next 10 years Outline recent passenger transport usage trends Trend 5.1: Freight transport by mode: goods moved billion tonne kilometres Road Rail Water Pipeline Total Tonne kilometres moved (defined as tonnes carried multiplied by kilometres travelled) has increased by 44 per cent since Freight moved increased overall by 44 per cent between 1980 and 2004, from 175 to 250 billion tonne kilometres. The majority of the increase is due to goods moved by road, which has increased by 72 per cent since 1980, from 93 to 160 billion tonne kilometres, although it has stabilised since Road freight now accounts for 64 per cent of all goods moved, compared with 53 per cent in Goods moved by rail declined slightly in the mid-1990s, but has since risen to reach 21 billion tonne kilometres. Between 1995 and 2004 goods moved by rail increased by 56 per cent; it now accounts for 8 per cent of all goods moved, compared with 10 per cent in Goods moved by water has increased gradually, from 54 billion tonne kilometres in 1980 to 59 billion tonne kilometres in However, as more freight is moved by road, water s share has reduced, from 31 to 24 per cent over the same period. Goods moved by pipeline has remained fairly stable over the last twenty years, at around 11 billion tonne kilometres. Source Dept for Transport Trends 2005 Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 14

9 1.5 UK transport trends by mode Describe key current UK transport trends for each main transport mode What are the current UK transport trends for road transport? Current UK trends for buses? What are the current UK transport trends for railways? What are the current UK transport trends for air transport? Sustained economic growth means higher car ownership and more goods and workers are being transported. Sustained under investment in infrastructure over 20 years means air rail and road networks are operating beyond capacity, in peak times, at current levels of demand. The duration of peak time periods is increasing. Projected increases in demand for car transport are unsustainable. Road is the dominant mode for all journeys of more than one mile and its share of journeys of all lengths is increasing Used predominately by high income groups The UK has less road capacity per car apart from Germany and higher average daily vehicle flows. Three in ten homes in Britain don't have a car (13 million people) CfIT forecast road congestion is set to grow by 65% by Motorway congestion is set to increase by 268% by Doubling the number travelling by public transport is equivalent to just 5 years projected growth in car traffic. Traffic on many roads, especially in rural areas, is set to double by Buses are used predominately by low income groups eg pensioners Buses are perceived as a poor substitute and exhibit a low even negative YED. Billion passenger kilometres is rising only slowly if not falling. Bus fares risen in real terms Rail is used predominately by high-income passengers. Bulk goods like coal use rail freight. There has been decades of under-investment in infrastructure and rolling stock for decades. After the Hatfield disaster, rail usage is rising. Since privatisation, rail passenger figures have risen 30 per cent and the network is operating beyond capacity. Up to 52 billion of investment may be required to meet increased demand of 50% There were 39.7 billion passenger kilometres in the whole of , 1% higher than in In the same year, there were 976 million passenger journeys, 2% higher than in Freight moved (measured in net tonne kilometres) decreased by 3% between and and freight lifted decreased by 8% over the same period. SRA Rail trips represented 6% of total passenger-kilometres in 2001, having grown by 29% since CfIT Air is used predominately by high income groups Projected doubling of air traffic over the next 20 years, Air Travel Projections especially in short haul no frills low cost carriers eg Ryanair 500 Premium short haul flights in decline; Long haul flights 400 affected 11 Sept especially trans-atlantic traffic Airports and ports handle substantial and growing numbers of 100 passenger movements. 0 Sept 11 has affected consumer behaviour with business travellers substituting video conferencing for flights Year Transport trends are usually assessed by data response questions. Note the equity issues raised: 1) Rail and air are used mainly by high income groups 2) 13m low income households do not own a car Around 60% of rail trips are for commuting and business travel DfT. Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 15

10 1.6 Estimating and Forecasting Transport Data What is a forecast A forecast is an estimate of what is likely to occur in the future. Firms base predictions on current data collected from primary or secondary research methods. Assumptions are made about key variables and their relationships. Statistical tools are used to predict future values Why are transport forecasts made? Data collection methods are? How are surveys conducted? Private sector transport operators such as Virgin Rail use forecasts to predict likely levels of demand for various services at different prices. The Dept for Transport needs accurate forecasts to estimate future demand & supply by mode; predict congestion levels and tax revenues. Primary (field) research gathers and analyses new data for the first time and for a specific purpose eg a new survey. Secondary (desk) research gathers and analyses existing data eg current road usage. Researchers consider cost speed accuracy & relevance of each method. The main method of collecting primary data is a survey of a sample of the population. The results of market research may be misleading because of sampling errors and non sampling errors from questionnaire design, or field worker, respondent or data processor errors Informed decisionmaking requires reliable data If demand is predicted to exceed supply operators can take action to increase capacity or reduce demand Are there alternatives to surveys? What is an economic model How does the Dept for Transport forecast future trends? Quantitative forecasting methods are Assumptions in quantitative forecasting? Rather than commission a survey a firm may use the Delphi or Panel technique and consult various experts. These experts discuss their own predictions amongst the group until a consensus view is reached eg the panel predicts journeys will rise 5% in the next 12 months. The historical analogy method bases the forecast for one product on the experience of similar products. Eg using the demand pattern for London congestion charging to predict impact of national road charging. Analogy is a comparison between different things An economic model is a simulation of a real world situation. Models require: Identifying key variables affecting behaviour eg what are the main factors to take into account in modelling car usage decisions? Establish and quantify relationships between these variables eg establish the price elasticity of demand for journeys Assumptions eg road users have perfect information and the economic growth rate will be x% in two years time. The Department for Transport (DfT) uses historical (secondary) data to estimate current vehicle ownership, rail usage etc. It then estimates likely trends in factors affecting transport usage eg economic growth and its impact on disposable incomes; price income & cross elasticity of demand estimates for each mode Many mathematical techniques can be employed to establish patterns in past data on which to base predictions, including: Causal methods quantify any cause & effect relationships between variables (correlation) to predict the effect of a change in a given variable on another. Eg the effect of rise in price on bus journeys ie PED. Time series methods map the movement of a variable over time and use techniques such as moving average to eliminate any seasonal or cyclical factors, and identify the underlying trend. The smoothed trend is then extrapolated (projected forward) Quantitative methods assume future behaviour mirrors today's. Quantitative techniques only work if patterns of behaviour observed in the past continue into the future eg consumers attitudes towards a product remain constant over time Sampling errors occur because only a small representative group are surveyed. There is always a chance their answers may be unrepresentative Explain time series data Time series data is a set of values observed regularly over time. eg annually, quarterly, daily, hourly, etc. Quarter Spring 06 Sum 06 Aut 06 Winter 06 Spring 07 Sales Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 16

11 What is a time series graph Time series graphs plot data on a given variable recorded over time eg monthly sales by value. Time series data has four components Trend: overall, persistent, long-term movement Seasonal: regular periodic fluctuations, within a 12-month period Cyclical: Repeating swings or movements over more than one year Random: Erratic random fluctuations Journeys Trend line Time A trend is a persistent long term movement in a time series eg upward downward or cyclical and is found by removing seasonal and cyclical factors Explain and illustrate extrapolation Extrapolation involves taking an existing trend and projecting it into the future. Extrapolation may be reliable in the short run given constant external factors. Extrapolation is a limited technique. Annual seasonal, cyclical or random fluctuations can render simple extrapolation useless. Extrapolation assumes external factors influencing past & present data will continue. Short term forecasts are more reliable than long term because external factors are more stable Journeys An upward trend & extrapolated forecast forecast actual Trends are identified using techniques such as moving average which smoothes a data series by removing seasonal or cyclical fluctuations. time Why might forecasts be wrong? Why may models prove inaccurate? What are the main problems firms experience in estimating elasticities Can the government change transport trends? A trend may be based on inaccurate data or wrongly interpreted results making any extrapolation unreliable. Extrapolating a trend to forecast the future ignores the potential impact of changing technologies, buying habits and rivals actions. Forecasts are based on past data trends. A sudden unexpected change in economic conditions or consumer taste may invalidate future trends. The specification and stability of statistical relationships used in the model may change over time. A model may leave out of factors that do not currently affect consumer behaviour but may in future be important determinants of transport demand. Elasticity is difficult and costly to measure and findings are only estimates. Elasticity estimates should be treated with caution: Collecting and interpreting data is expensive and time consuming Surveys are prone to statistical error eg sampling and non sampling errors Historical data may no longer be relevant consumer behaviour changes. Incomplete data may make predictions unreliable Any government policy that affects the supply or demand for transport influences transport trends. Eg fiscal policy changes tax levels hence disposable income; road pricing directly affects the cost of motoring; rail and bus subsides encourage the use of substitutes for cars heavily dependent of the cross elasticities of demand Key variables may be ignored eg negative externalities Eurotunnel forecasts did not take into account low cost air flights between London and Paris Many factors affect demand and supply. Inelastic demand for road transport limits policy Tutor2u Transport Economics Q&A 2006 Edition Richard Young Page 17