Transportation Economics Questions

04 Aug Transportation Economics Questions

1. Page 298 #1 a. In perfectly competitive markets, identify and brief discuss the three conditions for economic efficiency.

b. Based upon your current knowledge of intercity rail, bus, and airline passenger modes, in which sector do you believe resources are more efficiently allocated today? Would your answer change if the same question were asked for the year 1975?

2. Page 298 #3 Because the Pacific Northwest has a comparative advantage in the production of lumber and the Midwest has a comparative advantage in the production of foodstuffs, there will rise a demand for transporting foodstuffs from the Midwest to the Pacific Northwest and for transporting lumber from the Pacific Northwest to the Midwest.

a. Suppose a natural disaster, such as flooding, occurs in the Midwest which raise the cost of supplying wheat. What effect will this have upon the demand for transporting wheat from the Midwest to the Pacific Northwest?

b. Suppose that wheat is an inferior commodity. Then what will be the effect upon the demand for wheat transportation from a rise in per capita incomes in the Pacific Northwest?

c. Assume that nationwide there is a general fall in labor productivity. Can we predict the effect this would have upon the demand for transporting between the Pacific Northwest and the Midwest?

3. Page 299 #5

Owner operators in the truckload segment of the motor carrier industry could be viewed as monopolistic competitors since quality differences in their services enable them to offer similar but differentiated products.

a. Do firms in this sector have market power?

b. Will a typical firm in this industry make positive, negative, or zero economic profits? Graphically depict a typical owner operator’s long run equilibrium.

4. Page 300 #10

In work on airline fares, Morrison and Winston (1995) reported the following regression model results for the 3rd quarter of 1993. The sample included carriers providing direct or on-line connecting service for the 1,000 most heavily traveled routes in the U.S. t-statistics are in parentheses.

ln (average fare) = .027 ln (route competitors) .120 ln (airport competitors)

(2.1) (12.0)

+ .383 ln (distance) .048 ln (route passengers)

(47.9) (9.6)

R2 = .48

# observations = 5,513

a. From these results, does actual competition discipline the market? How about potential competition?

b. Are the results consistent with a model of pure contestability?

c. Why would you expect an increase in flight distance not to have a proportional effect upon airfares? Do the results in the above regression bear this out? What impact does a 10% increase in flight distance have upon airfares in 1993?

d. From the reported results, what effect does route density have upon airfares? Is it possible to explain the result on route density in terms of an airline’s load factors?

5. Page 300 #11

The truckload sector of the motor carrier has been described as highly competitive. For this segment of the industry, identify a typical firm’s short run profit maximizing problem and explain the condition that must be satisfied for its marginal cost curve to be interpreted as a short run supply curve. Holding all else constant, identify how each of the following changes affect the firm’s supply of transportation services:

a. increase in the price of fuel;

b. decrease in ton-miles shipped;

c. an increase in excise taxes on truck tires;

d. a profits tax, equal to (1/3) of any economic profits that the firm earns;

e. an increase in transportation rates;

f. increase in the price of a truck tractor;

g. improved truck designs which raises fuel efficiency

Chapter 8 Questions

6. Page 346 #1

Similar to oligopolies, monopolies and monopolistically competitive market structures are imperfectly competitive. Yet strategic behavior is only relevant for oligopolistic market structures. Why?

7. Page 348 #6

For a particular air carrier that operates nationally, one could define the carrier’s market in three alternative ways: 1) as the nation as a whole; 2) as a particular city-pair; 3) for a particular geographical region.

a. Based upon these definitions, how concentrated do you think the national market, individual city-pair market, and regional market would be using a four-firm concentration ratio?

b. If two air carriers merged, would this affect the concentration ratio of the national, regional, or individual city-pair market the most?

c. In light of the fact that the government passed legislation to deregulate airlines, do you think the government used the individual city-pair market as its definition of an air carrier’s market?

d. There has been a lot of discussion about an air carrier’s activities at its ‘hub’ airport. Is the 123 definition of hub operations most consistent with a national, regional, or city-pair market definition?

8. Page 349 #10

Suppose a shipper has the option of shipping her wheat by either rail or water carriage. Graphically depict the partial and general equilibrium effects of a technological innovation in water carriage.

9. Page 350 #11

The August 30, 1993 Wall Street Journal reported that Delta Airlines earned a net income of $7.1 million in the fiscal fourth quarter (April – June), compared with a loss of $180.2 million in the year ago period. According to the article, Delta’s earning performance reflects two industry trends: cost cutting and higher ticket prices. Use firm cost curves and market demand and supply curves to analyze Delta’s improvement.

10. Page 350 #13

a. Consider a price ceiling which mandates that a transport firm can charge no more than a certain rate for transporting goods. Under what condition will the price ceiling have an impact on market equilibrium and price? What are the efficiency effects of an ‘effective’ price ceiling, that is, a price ceiling which constrains the market?

b. Suppose the government mandates an effective price ceiling but also requires that all demand must be met at this rate. Are there efficiency effects from such a policy? If so, how do these differ from a price ceiling with no requirement to meet all demand at the regulated price?

Chapter 11

11. Page 494 #4

In the graph below, the distance 0a reflects road maintenance costs, the distance ab reflects vehicle operating costs, and the distance bc reflects time costs.

a. In the graph, which costs vary with traffic flow and which costs do not vary with traffic flow?

b. In general, which costs are borne privately by the motorist on this road?

c. In the absence of any government intervention, where will the market equilibrium occur? Demonstrate that this is an inefficient allocation of resources and identify the welfare losses associated with the equilibrium.

d. What is an efficient allocation of resources? Are all travelers better off from this efficient outcome?

12. Page 495 #6

Some would argue that the goal of public policy is not to reduce congestion but rather to eliminate congestion. In the graph below, we see that congestion sets in at traffic flow T1. Existing demand equals D1. The market attains an equilibrium at T3. Suppose a road tax were levied on travelers that reduced traffic flow to its uncongested level T1.

a. What would be the loss in consumer benefits from such a tax?

b. What would be the resource savings from this tax? c. What congestion revenues would be collected from such a tax?

d. Assuming that all congestion revenues were returned to a city’s residents, what would the net welfare effects of this policy?

e. In general, if too many resources are currently allocated to tripmaking because of congestion policies, how much congestion should be eliminated if we want an efficient allocation of resources to tripmaking?

13. Page 497 #12

In the late 1960s, there was talk about the possibility of extending the Kennedy International Airport on Jamaica Bay. The reason for this was the air traffic congestion that was building up on this and the other two airports in the area, namely, LaGuardia and Newark, New Jersey. The landing fees prevalent during the time led to three observations (Walters, 1973): 1) landing fees fixed by weight of the aircraft; 2) among the three airports, there was a progression of landing fees that was negatively related to the degree of air traffic congestion; 3) landing fees appeared to be low relative to the cost of expanding capacity.

a. What is ‘value-of-service’ pricing and how is this principle related to a structure of landing fees based upon aircraft weight? Is the setting of landing fees based upon value-of-service pricing more or less appropriate for capacity constrained airports?

b. By setting low landing fees, what signal is this giving for future investment?

14. Page 498 #13

In an effort to reduce mid-day congestion due to non-work (i.e. shopping, recreational, etc.) automobile trips, a transportation economist proposes a 15% increase in the gasoline tax. She estimates a discrete choice model, the results of which are reported in the table below.

Variable	Coefficient	t-statistic
Constant (auto)	-4.23	-2.10
Travel Cost (bus,auto)	-0.04	-2.65
Travel Time (bus,auto)	-0.001	-0.05
Total Waiting Time (bus)	-0.529	-2.62
#Cars in Household (auto)	1.52	2.51
Family Income (auto)	0.00006	1.67

a. What do these results tell you about the effect of travel time and travel cost on nonwork mode choice?

b. According to these results, are higher income households more or less likely to take the bus for their non-work trips.

c. Will the proposed increase in the gasoline tax have any effect on non-work trips? Assume that 95% of the population currently use an automobile in their non-work trips and that the average cost of an automobile trip is $1. What is the elasticity of non-work trip auto with respect to automobile costs? What does this imply about non-work trip auto use if the gasoline tax raises per trip auto costs by 15%.

d. Given your answer in part c, will the economist’s proposal meet her objective?

15. Page 498 #14

“Gridlock” is a term that characterizes a transportation network on which all traffic has stopped. No one is going anywhere. Although most urban systems experience gridlock at times, the more common phenomenon is slow moving, although heavily congested, traffic.

a. Why do economists believe that traffic congestion produces an inefficient allocation of resources?

b. “The objective of congestion pricing is to smooth out peak period demand so that the level of congestion during the peak period is no higher than during the off-peak period.” Critically evaluate this statement.

CHAPTER 13

16. Page 601 #1

Consider the market for transportation safety in the city of Riskless. The marginal benefit of safety falls with increasing safety and the marginal cost of providing safer trips rises.

a. Graphically depict the market for safety;

b. In an effort to eliminate all highway transportation accidents, Riskless bans motor vehicle travel. Graphically depict the economic effects of this policy and briefly explain whether Riskless is worse off or better off from this policy.

c. What is an optimum amount of safety and what is meant by an ‘optimum number of fatalities’?

17. Page 601 #4

Fatalities and Fatality Rates: 1995

Transportation Mode	Fatalities (Number)	Fatality Rate
US Air Carrier	168	0.030 Per Million Miles
Motor Vehicle	41,798	1.725 Per 100 Million Vehicle Miles Traveled

a. Based upon the information above for 1995, what is the probability of a fatality on a U.S. Air Carrier for a 5,000 mile round trip flight from Here to There?

b. How does this compare with the probability of a fatality if you decided to make the trip by car rather than by plane?

c. Based upon the probability of a fatality, which mode would you take for your trip? Suppose the airline added some safety improvements which reduced the probability of a fatality by a third. Would this change your modal decision?

d. In general, you will be willing to pay a certain amount of money in order to reduce your risk of a fatality. Consider the following expression: Value of Life =Willingness to Pay/Reduction in Probability of Fatality Suppose you are willing to pay $100 for the reduction in fatality risk from the safety improvements (for the trip and safety improvement indicated in part c). What implicit value are you placing upon life?

18. Page 602 #5

For the seat belt use model in Table 2, we can write the following indirect utility functions associated with ‘no seat belt’ and ‘seat belt’ use:

Vno seat belt 0

Vseat belt 11.08 2.78 (Time to Fasten) + .782 (Comfort Indicator) 1.84 (No Serious Accident) + .00038 (Annual Vehicle Miles Traveled) .006 (Vehicle Weight) + 1.198 (Probability of Auto- Related Injury for Households with Incomes < $35,000) + 3.305 (Seat Belt Effectiveness Belief) + .079 (Age of Driver)

a. What impact does a 1,000 miles increase in Annual Vehicle Miles have upon the indirect utility of seat belt use relative to the indirect utility of no seat belt use? What about a minute increase in Time to Fasten Seat Belts? A 1% (i.e. .01) increase in the Probability of an Auto-Related Injury for Households with incomes < $35,000? A 500 pound increase in Vehicle Weight?

b. Suppose an individual driver values her time at $15.00 hour. If it takes her 3 seconds to buckle her seat belt, what value does she place upon the time spent buckling? Holding all else constant, assume that she buckles and unbuckles six times a day for, 365 days a year, how much annually would she be willing to pay for an airbag which entails no buckling? Assuming that she plans to purchase a new car. In the new car, she has a choice of either seat belts or an airbag but the airbag equipped car costs $300 more. If she plans to keep the car for the rest of her life assuming a 10% rate of interest, will she buy the airbag equipped car? What if the interest rate falls to 5%?

19. Page 602 #7

a. In general, what factors determine an individual’s optimal level of safety?

b. Describe and graphically depict an individual driver’s optimal speed on an interstate system. Identify some of the components in the opportunity cost of higher speeds.

c. Due to budget cuts, police officers spend less time catching speeders. Discuss, and graphically depict, the likely impact this will have upon your optimal speed.

d. Suppose your optimal speed on an interstate highway is 68 miles per hour. The speed limit is posted at 65 miles per hour. Are there any efficiency effects of you traveling at 65 miles per hour?

20. Page 603 #11

Consider the following truck safety model based upon annual time series data between 1976 and 1989. Dependent variable—fatalities per 100 million vehicle miles in accidents involving motor carrier combination trucks MCA1—reflects administrative deregulation in the motor carrier industry prior to enactment of the 1980 Motor Carrier Act; MCA2—reflects enactment of the 1980 Motor Carrier Act; STAA—reflects enactment of the 1982 Surface Transportation Assistance Act which increased minimum truck lengths and maximum truck widths, mandated states to allow twin trailers, and barred states from reducing truck lengths and widths if these exceed those in the STAA law.SPD65—reflects 1987 federal law that allowed 65 mile per hour speed limits on rural interstate highways.

A Regression Model of Truck Safety
Explanatory Variable	Coefficient Estimate (t-stat)
Constant Term	425.7 (5.90)
STAA (0=1976-82, 1=1983-9)	0.095 (0.66)
MCA1 (1=1978-9, 0=Otherwise)	0.238 (2.04)
MCA2 (0=1976-9, 1=1980-9)	-0.337 (-1.91)
65 Speed Limit (0=1976-86, 1=1987-9)	-0.198 (-1.37)
Time Trend	-0.211 (-5.79)
R2=0.989 Number of Observations=14

a. Over the period of the analysis, are the results consistent with an overall improvement in motor carrier safety?

b. As you know, the 1980 Motor Carrier Act significantly relaxed economic regulations of the industry allowing for price and route flexibility, greater freedom on commodities carried, and freer market entry. What do the results say about the impact of the 1980 Act on truck safety? What implications, if any, might this have on the safety characteristics of new entrants?

c. The 1982 STAA generally led to an increase in the size and weight of large trucks on the road which might be expected to increase the fatality rate. The Act also led to a more uniform fleet size across the nation which could be argued as safety enhancing. From the above results, which of these effects dominated?

d. All else constant, was the increase in rural interstate speed limits detrimental to truck safety? Could this result be explained in terms of the law’s impact on speed variance?