Efficiency Benefits of Transport Cost Reductions

Transport cost benefit analysis, when properly done, takes account of the benefits arising from increased transport demand induced by lower transport costs, and these benefits are typically evaluated by the rule-of-one-half or the trapezium rule. This states that the transport gain is the average level of transport services times the fall in transport costs, Σ–2 (qi′ + qi).(-∆ti), where qi is the number of trips on route i, -∆ti is the fall in transport costs per trip on that route, and a dash indicates the post-improvement situation. One very important set of issues in undertaking such transport evaluations is to pick up the total impact of any scheme, which in a network may affect traffic flows and congestion delays on a whole range of routes apart from the one subject to investment. Transport cost reductions may also yield indirect benefits that are not captured by simple cost-benefit analysis, and that is the subject of current SACTRA interest in the links between transport investment and economic growth. One part of that is the implications of imperfect competition for transport appraisal. These indirect benefits arise from two sources if prices fall and as a result output increases, then there will be an increase in profits if firms are pricing above (long-run) cost because of imperfect competition. If firms are located at different distances from a given market, then lowering the transport cost will lower the effective delivered price, and increase the intensity of competition between firms, particularly as more firms may find it worthwhile competing for access to a given market. The paper constructs a model of imperfect competition between suppliers of a homogenous good (which could either be an input or a final consumption good) from geographically dispersed firms who compete imperfectly in a central market place. The impact of improvements which lower the costs of transporting the good to market are examine for the case in which firms price to market and compete in that market, taking the supplies of their rivals as given (though the paper discusses different formulations of competitive behaviour, which may be either more or less intense). Different firms face different delivery costs, and these affect their market share and their impact on prices. The first model examines the effect of a general reduction in transport costs facing all firms, of the kind associated with a fall in fuel excise duty, so the percentage change in transport costs is the same for all, but the relative impact on total costs is larger for more distant firms. The second model examines the effect of a change in the transport cost of