Port Costs and Pricing

PORT COSTS AND PRICING This thesis is submitted in partial fulfilment of the requirements for the degree of DOCTOR OF PHILOSOPHY of the COUNCIL FOR NATIONAL ACADEMIC AWARDS by JOHN ROBERT MOON Department of Maritime Studies, Liverpool Polytechnic June 1932 ABSTRACT Title of Thesis: PORT COSTS ? ND PRICING Author: JOHN ROBERT MOON This thesis is an economic analysis of the pricing practices of sea- ports, the problems encountered by the ports when devising their tariffs and the alternative solutions which could be adopted - with particular reference to the Port of Liverpool. The conditions necessary for the first best world of economic theory may not be met in the port case. As a consequence, it may be necessary to introduce further constraints into the welfare maximis- ation problem. The thesis carefully considers the pricing and investment problems facing the port under the unifying heading of jointness; discusses the recommendations of various official bodies and adopts a "commercial concern" maxim; and subjects the allocative properties of alternative pricing systems to detailed examination.. In spite of the violation of the assumptions of the basic model, marginal cost remains intact as the relevant basis for pricing, investment and traffic acceptance decisions. In an attempt to measure these costs a detailed examination of the concept of escapable cost and the allocation of joint costs to the relevant traffic is undertaken. This examination expands a methodology suggested for the railway case and extends-the analysis to include the temporal dimension. This theoretical treatment of escapable costs is then applied to the port case, where the problems that may be encountered in its implementation are considered. A detailed examination of the charging schedules is undertaken, where the properties of the charges are considered. base The charging and tariff structures are analysed with: an empirical investigation of the relationships between alternative bases; an examination of measures of consumers' willingness to pay; and consideration of vertical and horizontal equity. An overall approach to pricing and investment is outlined and some methodologies which may be employed by the port when computing its prices are developed. ACKNOWLEDGEMENTS I am indebted to J. A. Holt, the Research Supervisor,. far his guidance and support in the preparation of this thesis. I would also wish to thank the Chairman and staff of the Mersey Docks and Harbour Company for their time and the assistance which they have given to me. It remains however to state that all errors, omissions and interpretations (particularly of the Ports' pricing practices) are the sole responsi- bility of the author. Contents Page List of Tables List of Figures Chapter 1 Introduction 1 1.1 Port Tariffs and the Charging Base 2 1.2 Criticisms of Existing Tariff Structures 4 1.3 First Best Pricing and Investment 8 1.4 The Port's Pricing objectives 9 1.5 Official Recommendations 11 1.6 Aims and Outline of the Thesis 20 Chapter 2 The Port's Pricing and Investment Problem 25 2.1. Introduction 25 2.2 Indivisibilities and Jointness 25 2.3 Jointness in Consumption 31 2.4 Technical Jointness in Production 32 2.5 Discrete Factor Inputs 34 2.6 Temporal Jointness in Production 39 2.7 Fluctuations in Demand over Time 42 2.8 The Nature of the Port's Assets and Excess Capacity 42 2.9 Externalities 44 2.10 Summary and Conclusions 46 Chapter 3 Pricing-Systems 49 3.1 Introduction 49 3.2 Homogeneous Consumers, Case I 53 3.3 Homogeneous Consumers, Case II 62 3.4 Heterogeneous Consumers 66 3.5 Summary and Conclusions 72 Page Chapter 4 Port Costs and Traffic Characteristics 80 4.1 Introduction 80 4.2 Conservancy 80 4.3 Docks and Berth 85 4.4 Cargo Handling 86 4.5 Shore Infrastructure and Superstructure 87 4.6 Characteristics of Ships and Goods 89 4.7 Summary and Conclusions 95 Chapter 5 Measurement of Escapable Costs - Introduction 97 5.1 Introduction 97 5.2 The Accountant's Approach to the Measurement of Marginal Cost 97 5.3 The Economist's Approach to the Measurement of Marginal Cost 100 5.4 Escapable, Opportunity and Conventional Costs 113 5.5 Opportunity Cost and Asset Valuation 122 5.6 Opportunity Costs, Asset Valuation and Time 131 5.7 Directly Attributable Costs and Time 140 5.8 Summary and Conclusions 146 Chap ter 6 Measuring Escapable Costs - Conservancy 152 6.1 Introduction 152 6.2 The Services and Facilities 153 6.3 Traffic Identification 159 6.4 Traffic and Facilities 164 6.5 Identifying Escapable Costs 171 6.6 Allocation of Costs 180 6.7 Summary and Conclusions 181 Chapter 7 Measuring Escapable Costs - Docks 184 7.1 Introduction 184 7.2 Services and Facilities - Dock Entrance to the Quaywall 184 7.3 Services and Facilities - Berth to the Dock Gate 194 7.4 The Port's Technical Efficiency 204 7.5 Traffic, Facilities and Costs 206 7.6 Summary and Conclusions 221 Page Chapter 8 Measuring Escapable Costs - Cargo Handling 224 8.1 Introduction 224 8.2 Cargo Handling Operations 224 8.3 The Costs of Labour 227 8.4 Establishing the Revenue Rate (Price) 243 8.5 Traffic 248 8.6 Escapable Costs in the Short-Run 250 8.7 Escapable Costs in the Long-Run 252 8.8 The Escapable Cost Matrix 253 8.9 Summary and Conclusions 258 Chapter 9 Mersey Docks and Harbour Company (MDHC) Charging Schedules 262 9.1 Conservancy 262 9.2 Berth Charges 9.3 Charges on Goods 281 9.4 Cargo Handling 293 9.5 Summary and Conclusions 313 Chapter 10 The Charging Base and Tariff Structure 320 10.1 Introduction 320 10.2 The Charging Base 320 10.3 Willingness to Pay 345 10.4 Equity Considerations 357 10.5 Effect on the Port of the Impact of the Charge 362 10.6 Summary and Conclusions 364 Chapter 11 Summary and Conclusions 371 11.1 Problems and Solutions 371 11.2 Escapable Costs 375 11.3 The Overall Approach 377 11.4 Devising a Pricing System 382 11.5 Conclusions 401 Bibliography 406 List Tables of Page 2.1 Indivisibilities and Jointness in Production and Consumption 27 5.1 Calculation of Escapable Costs (EC) 103 5.2 Calculation of Directly Attributable Costs (DAC) 105 5.3 Rearrangement of Table 5.2 in Matrix Form A. DAC = EC 109 5.4 Rearrangement of Table 5.2 in Matrix Form A-1. EC = DAC 110 5.5 N. P. C. Asset Lives 135 5.6 Directly Attributable and Escapable Cost Matrices for the two Traffic Case 144 5.7 A Specific Example of the DAC, and EC Matrices in the two Traffic Case 145 6.1 Survey Areas and Frequency of Survey 155 6.2 The Number of Combinations of Traffics 163 6.3 Joint Maintenance Dredging Costs 167 6.4 Escapable Cost Matrix for Conservancy 172 6.5(a), (b) Services and Facilities Provided Specifically for Garston 174 7.1 Liverpool North Docks - Description, Dredging and Surveying 189 7.2 Birkenhead Docks 192 7.3 Liverpool North-Docks - Traffic and Facilities 7.4 Birkenhead Docks - Traffic and Facilities 202 7.5 Major Capital Projects - Liverpool 208 7.6 Major Capital Projects - Birkenhead 209 7.7 Costs of Capacity Warranted by Demand 211 7.8 MDUC Fixed Assets 212 8.1 Booster Payments Scheme 233 8.2 Labour Loading Schedule Categories 241 8.3 Pro-forma for Computing the Revenue Rate 248 8.4 An Escapable Cost Matrix for Cargo Handling 254 9.1 Profit and Loss Account 263 9.2 Frequency of Charges on Goods - Import and Export 281 9.3 MDHC Charges on Goods (Imports) 284 9.4 Summary of Loading Stevedoring Schedule 295 10.1 Examination of Alternative Bases for the Assessment of Port Rates 327 Page 10.2 Correlation Matrices of Vessel Dimensions 332 10.3 Regressions of the Untransformed dwt! s on grt 335 10.4 Dues per dwt for given grt (Untransfo'rmed data) 336 10.5 Regressions of.. -the Transformed.. dwt's on grt 337 10.6 Dues per dwt for given grt (Transformed data) 338 10.7 Regressions of the Untransformed lengths on grt 339 10.8 Dues per unit length for given grt (Untransformed data) 339 10.9 Regressions of the Transformed lengths on grt 340 10.10 Dues per unit length for given grt (Transformed data) 341 10.11 The Sensitivity of-Time and Tonnage Based Cargo Handling Charges 342 10.12 United Kingdom Import Elasticities and Unit Values (Port of Liverpool) 350 10.13 United Kingdom Export Elasticities and Unit Values (Port of Liverpool) 352 10.14 Charges on Vessels - Tees and Hartlepool Port Authority 359 10.15 Regressions of Transformed g. r. t. and dwt on n_.r. t. - General Cargo 360 11.1 Schematic Presentation of the Recommendations in the 1978 White Paper "The Nationalised Industries". 379 .1 List Figures of Page 1.1 Schematic Presentation of the Recommendations in the 1978 White Paper "The' Nationalised Industries" 17 2.1 Indifference and Transformation Curves for the Canal Example 35 2.2 Discrete Output and Fork-Lift Trucks 38 3.1 The SPOC and PPC Curves 51 3.2 Single Price Offer Curves and Willingness to Pay 52 3.3 Marginal and Average Cost Pricing 54 3.4 Two-Part Tariffs 56 3.5 Limits for a Two Block Tariff given that Total Revenue = Total Cost 58 3.6 Multi-Part Tariff 59 3.7 Versions of the Multi-Part Tariff 61 3.8 Extracting Compensating Variation 62 3.9 No Single Price such that TR = TC 63 3.10 Exploitation Possibility Curve 65 3.11 Perfect Price Discrimination 66 3.12.

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