Chapter 13

• Chapter aims

  • Explain why governments intervene in the transport market and provide a concise overview of dominant transport policies
• Reasons for Government Intervention


  • Market failure: When the market does not result in optimal outcomes from a societal perspective, leading to inefficiency in resource allocation
  • Equity reasons: To ensure fair distribution of costs and benefits of transport, and to provide sufficient mobility and accessibility for all
  • Revenue generation: Governments may tax the transport market to generate general revenue, often through vehicle taxes, fuel levies, etc.
• External Effects in Transport

  Costs or benefits incurred by third parties, outside the decision-making process of travelers or freight transporters
• Criteria for Healthy Policies

  Defining healthy transport policies focusing on efficiency, equity, and political interests
• External Costs in Transport


  Imposed on third parties, including environmental degradation, safety risks, and reduced accessibility
• Policy Perspectives on External Costs

  • External costs crucial in shaping transportation policy, prompting governments to intervene to internalize externalities and promote sustainable and equitable transport systems
  • Acknowledging and mitigating external costs essential for designing policies that optimize resource allocation, enhance social welfare, and foster sustainable mobility solutions
  • Government intervention mechanisms, including regulations, pricing mechanisms, and investment strategies, instrumental in mitigating negative externalities and promoting efficient operation of transportation markets
• Linkage Between External Effects and Environment, Safety, and Accessibility

  External effects closely intertwined with concerns related to environmental sustainability, road safety, and equitable access to mobility
• Positive External Benefits in Transport


  Improved accessibility and economic development resulting from transportation infrastructure projects
• Policy Objectives

  • Maximizing efficiency
  • Addressing equity issues
  • Serving politicians' self-interests
• Shift in Perspective

  Private perspective of individuals and companies making travel decisions to the government perspective, considering societal impacts and intervening with transport policy
• Internal Costs in Transport

  Directly borne by travelers or shippers, such as travel time and fuel expenses
• Regulation in Transport

  • Infrastructure provision
  • Taxation
  • Public transport subsidies
  • Traffic rules
  • Emission standards
• Examples of Policy-Making

  • Illustrating different interventions and their implications
• Negative External Costs in Transport

  Factors like air pollution, traffic accidents, and congestion imposing financial, health, and societal burdens on affected communities
• Third-Party Implications of External Costs

  Non-traffic participants exposed to environmental hazards, as well as other road users vulnerable to accidents caused by fellow travelers' decisions
• Recognizing the significance of external effects is paramount for understanding external costs in transport policy
• Integration with Previous Chapters on Technological Solutions and Policy Frameworks


  Insights from earlier chapters providing context for addressing external costs and formulating effective interventions
• Negative external costs


  • Expenses or harms borne by individuals, communities, or the environment, not factored into the decision-making process of travelers or transporters
  • Examples include air and noise pollution, congestion-related delays, accidents, and habitat disruption
• External Costs


  • Definition and Nature of External Effects
  • Negative external costs
  • Focus on Negative External Costs
  • Types of External Effects
• Policy Implications and Mitigation Strategies

  1. Effective transportation policies aim to internalize external costs, ensuring that those responsible for generating negative impacts bear the associated expenses

  2. Policy instruments such as road pricing, emissions taxes, parking fees, and infrastructure investments can help incentivize behavior change, reduce negative externalities, and promote sustainable transportation practices

  3. Collaborative approaches involving government agencies, industry stakeholders, community groups, and environmental advocates are essential for developing and implementing comprehensive strategies to address external costs and foster more equitable, efficient, and environmentally friendly transportation systems
• Pricing mechanisms and investment strategies

  Instrumental in mitigating negative externalities and promoting the efficient operation of transportation markets
• External effects in transportation


  Refer to unintended consequences, both positive and negative, that arise from travel or freight transport activities
• External Benefits

  • Definition of External Benefits
  • Rationale for Government Intervention
• Types of External Effects

  • Costs due to the Use of Transport Means
  • Costs due to Vehicle Ownership and Availability
  • Costs due to Infrastructure
• Internalization of External Costs

  1. Market Distortions due to failure to internalize external costs

  2. Efficiency Gains from aligning private incentives with societal welfare

  3. Policy Instruments used by governments to internalize externalities

  4. Challenges in implementing internalization measures
• External benefits in transportation markets

  Can lead to an insufficient level of transportation activity from a societal perspective if left unaddressed, potentially hindering economic growth, social cohesion, or cultural exchange
• Transport Pricing Policies

  1. Pricing Mechanisms used by governments

  2. Revenue Generation from pricing policies

  3. Equity Considerations in designing pricing policies

  4. Behavioral Responses to effective pricing policies
• Transport Market Equilibrium

  • Private Optimum occurs where marginal private cost equals marginal private benefit
  • Social Optimum occurs when marginal social cost equals marginal social benefit
  • Without internalization, the market may under-optimize transport services
  • Governments intervene to move the market towards the social optimum
• Externalities in Transport


  • Negative Externalities: congestion, air pollution, noise pollution, accidents
  • Positive Externalities: improved accessibility, enhanced connectivity, increased economic activity in surrounding areas
  • Unintended Consequences: external effects that extend beyond the immediate participants, affecting communities, ecosystems, public health
  • Scope of Externalities: range from localized impacts to broader societal issues like greenhouse gas emissions contributing to climate change
• Like negative external costs, external benefits are often overlooked in market transactions because individuals or shippers do not factor them into their decision-making process when choosing to travel or transport goods
• Evaluation of Transport Policies through CBA

  1. CBA is widely used to evaluate the economic viability and social desirability of various transport policies, ranging from infrastructure investments to regulatory measures

  2. By systematically assessing the costs and benefits of alternative policy options, CBA provides policymakers with valuable insights into the potential impacts of their decisions on societal welfare
• Behavioral Responses


  Effective pricing policies can lead to behavioral changes among consumers and producers, encouraging mode shifts, route optimization, and adoption of cleaner technologies
• Fair and Efficient Pricing in Transport

  1. Policymakers aim to implement transport pricing mechanisms that not only internalize external costs but also promote fairness by ensuring that those who impose costs bear the associated financial burden

  2. Efforts to achieve fair and efficient pricing may involve designing pricing schemes that consider income distribution and equity concerns
• Valuation Techniques


  1. Researchers employ various valuation techniques, including contingent valuation methods (CVM), to estimate people's willingness to pay (WTP) or willingness to accept (WTA) compensation for non-market goods

  2. The results of valuation studies are often uncertain and subject to debate, particularly regarding the valuation of carbon emissions, damage to nature or landscapes, and other non-tradable goods affected by transport activities
• Uncertainty and Controversies

  1. Valuation results for externalities like carbon emissions or damage to ecosystems often vary and are subject to uncertainty due to methodological differences and subjective interpretations

  2. Issues such as the valuation of carbon dioxide emissions or the impact of new infrastructure on landscapes are highly contentious within the academic and policy communities
• Implementation of Urban Charging Schemes

  1. Urban charging schemes, such as congestion pricing initiatives, are implemented in cities worldwide to alleviate traffic congestion, reduce pollution, and internalize the external costs of road usage

  2. Examples include schemes implemented in cities like London, Singapore, Stockholm, and Milan, which charge drivers for entering certain areas during peak times
• Monetizing External Costs

  1. The main obstacle in implementing welfare theory lies in monetizing external costs associated with transport, such as traffic congestion, noise pollution, accidents, and air pollution

  2. Determining the monetary value of these externalities is complex due to their intangible nature and the absence of market prices for such impacts
• Cost-Benefit Analysis (CBA)


  • Systematic approach to evaluating the economic efficiency of proposed transport projects or policies by comparing their total expected costs and benefits
  • Helps policymakers prioritize projects and allocate resources effectively by quantifying both tangible and intangible impacts and expressing them in monetary terms
• Equity Considerations


  Policymakers must balance the goals of efficiency and equity when designing pricing policies, ensuring that the burden of costs is distributed fairly across different income groups
• Critique on Nature Valuation

  1. Scholars have critiqued the practice of valuing nature, highlighting the challenges and limitations of assigning monetary values to ecological and aesthetic attributes

  2. Policymakers and researchers must navigate controversies and uncertainties when using valuation techniques to inform policy decisions related to transport infrastructure and environmental management