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Contents 1 About 3 1.1 Authors ..................................... 3 2 Introduction 5 2.1 What is Transportation Economics? ..................... 6 2.2 Demand Curve ................................. 7 2.3 Demand and Budgets in Transportation ................... 7 2.4 The Shape of Demand ............................. 8 2.5 Supply Curve .................................. 8 2.6 Supply and Demand Equilibrium ....................... 9 2.7 Equilibrium in a Negative Feedback System . 10 2.8 Disequilibrium .................................. 11 2.9 Provision ..................................... 14 2.10 Principles .................................... 15 2.11 Thought questions ............................... 16 2.12 Sample Problem ................................. 16 2.13 Key Terms .................................... 16 3 Agents 19 3.1 A game ..................................... 19 3.2 Game Theory .................................. 19 3.3 Applications of Game Theory to Transportation . 21 3.4 Issues in Game Theory ............................. 22 3.5 Thought Question ................................ 23 3.6 Problem ..................................... 23 3.7 Zero-Sum .................................... 23 3.8 Problem Extension ............................... 23 3.9 Mixed Strategies ................................ 24 3.10 Further Applications .............................. 24 4 Ownership 25 4.1 The Ownership of Transportation Networks: A Rationale . 25 4.2 The Nature of Transportation as a Good and Its Ownership . 28 4.3 Realms of Public and Private Involvement . 31 4.4 Differences in Transportation Ownership by Country . 34 4.5 Privatization ................................... 39 4.6 Transit Bus Privatization ........................... 41 4.7 Road Privatization ............................... 46 4.8 Thought Question ................................ 48 4.9 Public Policy Questions ............................ 48 III Contents 4.10 Exercise ..................................... 48 4.11 References .................................... 48 5 Regulation 49 5.1 Objectives for Government Intervention ................... 49 5.2 Instruments of Government Intervention ................... 51 5.3 Rationales for Economic Regulation ...................... 55 5.4 Tools of Economic Regulation in Transport . 59 5.5 Regulation by Mode .............................. 61 5.6 Effects of Economic Regulation ........................ 63 5.7 Effects of Economic Deregulation ....................... 65 5.8 Theory of Contestable Markets ........................ 65 5.9 References .................................... 67 6 Productivity 69 6.1 What is Productivity? ............................. 69 6.2 Macroscopic Productivity ........................... 69 6.3 Microscopic Productivity ............................ 70 6.4 References .................................... 76 7 Revenue 77 7.1 Revenue Sources ................................ 77 7.2 Financing Programs .............................. 89 7.3 Evaluating Revenue Sources .......................... 90 7.4 Cost Allocation ................................. 91 7.5 Example: Financing Transportation in Minnesota . 91 7.6 Logrolling .................................... 91 7.7 The Choice Between Taxes and Tolls ..................... 93 7.8 References .................................... 94 8 Pricing 95 8.1 Rationales for Pricing ............................. 95 8.2 Theory of Congestion Pricing ......................... 97 8.3 Alternative Revenue Mechanisms ....................... 98 8.4 Effects of Congestion Pricing ......................... 99 8.5 Unpacking .................................... 101 8.6 Welfare Analysis ................................ 103 8.7 Use of the Revenue ............................... 104 8.8 Pricing and Cost Recovery . 104 8.9 Vickery’s Types of Congestion . 104 8.10 Marginal Cost Pricing ............................. 105 8.11 Profit Maximizing Pricing . 108 8.12 Discussion .................................... 114 8.13 Additional Problems .............................. 114 8.14 References .................................... 114 9 Supply chains 115 9.1 Network Model of the Economy ........................ 115 IV Contents 9.2 Supply Chains .................................. 118 9.3 Modeling Approaches .............................. 120 9.4 Bullwhip effect ................................. 120 9.5 Freight Logistics ................................. 121 9.6 References .................................... 122 10 Production 123 10.1 Introduction ................................... 124 10.2 Transportation and Production . 125 10.3 Characterizing Transportation Production . 126 10.4 Production Theory ............................... 128 10.5 Efficiency .................................... 128 10.6 Production Possibilities Set . 129 10.7 Functional Forms ................................ 130 10.8 Characteristics of a Production Function . 133 10.9 Isoquants .................................... 134 10.10 Constrained Optimization . 135 10.11 Optimization .................................. 138 10.12 Duality ...................................... 139 10.13 Factor Demand Functions . 140 10.14 Input Cost Functions .............................. 141 10.15 Technical Change ................................ 142 10.16 References .................................... 143 11 Costs 145 11.1 Introduction .................................. 145 11.2 Supply ...................................... 145 11.3 Types of Costs ................................. 146 11.4 Time Horizon .................................. 149 11.5 Indicators of Aggregate Cost Behavior . 151 11.6 Characterizing Transportation Costs . 155 11.7 Costing ...................................... 156 11.8 Aggregate Cost Analysis ............................ 157 11.9 Disaggregate Costing .............................. 158 11.10 Evidence on Carrier Costs . 160 11.11 Evidence on Infrastructure Costs . 162 11.12 Factors affecting Transportation Costs . 165 11.13 References .................................... 169 12 Negative externalities 171 12.1 Introduction ................................... 171 12.2 Definitions .................................... 173 12.3 Cause ...................................... 173 12.4 Pareto Optimality ................................ 174 12.5 Thought Question ................................ 174 12.6 Damages vs. Protection ............................ 175 12.7 Systems ..................................... 177 12.8 Theory ...................................... 179 V Contents 12.9 Government Standards ............................. 180 12.10 Prices ...................................... 183 12.11 Measurement .................................. 184 12.12 Issues ....................................... 185 12.13 Cost-Function Estimation Methods . 186 12.14 Incidence, Cost Allocation, and Compensation . 189 12.15 Evidence on Pollution ............................. 193 12.16 Standards vs. Prices .............................. 194 12.17 Private Cost v. Social Cost . 194 12.18 Full Cost Model ................................. 194 12.19 Thought Question: Value of Life . 202 12.20 References .................................... 203 13 Utility 205 13.1 Indifference Curves ............................... 205 13.2 Substitutes and Complements . 206 13.3 Trade Game ................................... 207 13.4 Preference Maximization ............................ 208 13.5 Demand, Expenditure, and Utility . 211 13.6 Measuring Welfare ............................... 212 13.7 Arrow’s Impossibility Theorem ........................ 213 13.8 Preferences ................................... 214 13.9 References .................................... 214 13.10 Further Reading ................................. 214 14 Demand 217 14.1 Individual Demand Functions . 217 14.2 Aggregate Demand ..............................