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Some Notes on the Economics of Transportation*

Published online by Cambridge University Press:  07 November 2014

J. A. McDonald
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Extract

Since well before the turn of this century economists have been attempting to explain the phenomena associated with pricing in the transportation industry. Of recent years this subject has received both descriptive and prescriptive treatment at the hands of welfare economists. In the course of this paper it will be argued that the current descriptive theory is based upon a fundamental misconception of the nature of transportation output and that, in consequence, the policy prescriptions, even when they are right, are usually right for the wrong reasons.

As a starting point it will be useful to recall a controversy which began with a journal article, written some sixty years ago, in which Professor Taussig was endeavouring to show that railway rates could be fitted within the framework of general price theory. He argued that the wide differentials which were apparent in the railways' charges for their services could be explained by the preponderant influence of joint costs. If this were true, the rates charged for output A would be the consequence of passive adjustments in price to changes in the output of B in response to changes in demand for the latter product. Actually Taussig argued that the commodities transported (e.g., coal and copper) were sold to different consumers and should be treated as different products. Many years later the criticisms of Professor Pigou precipitated a lengthy debate over the validity of the joint cost doctrine, Pigou contending that railway output was homogeneous and measurable in units of ton-miles.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 17 , Issue 4 , November 1951 , pp. 515 - 522
Copyright
Copyright © Canadian Political Science Association 1951

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Footnotes

*

This paper was presented at the annual meeting of the Canadian Political Science Association in Montreal, June 8, 1951.

References

1 A convenient reference to some of the literature is to be found in two articles by Ruggles, Nancy, “The Welfare Basis of the Marginal Cost Pricing Principle,” and “Recent Developments in the Theory of Marginal Cost Pricing,” Review of Economic Studies, 1949–1950, XVII(1), no. 42, and XVII(2), no. 43.Google Scholar

2 “A Contribution to the Theory of Railway Rates,” Quarterly Journal of Economics, V, 07, 1891.Google Scholar

3 Ibid., Feb., May, Aug., 1913.

4 Cf. Lewis, Arthur, “Fixed Costs,” Econmica, 1946.Google Scholar

5 More rigorously, if the product substitution curve for two blocks of output measured in natural units has a slope of unity then that part of output is homogeneous.

6 The Economics of Welfare (4th ed., London, 1948), 298.Google Scholar

7 Through the kind of freight classification in common use on railways.

8 Speed is an independent source of cost as the designers of all kinds of motive power are well aware. The behaviour of cost in relation to speed is briefly treated by Ashton, , “The Time Element in Transportation,” American Economic Association, Proceedings, 1947.Google Scholar

9 By “constellation of demand” I mean that the demand of each consumer of railway output would exhibit a particular pattern of distribution over the conventional time period–as for x tons to be transported between A and B at z miles per hour a certain number of times per week, month, etc.–to which production will tend to respond. The marginal significance of speed to the consumer is greater where competition between transport firms is keen, or where the market demand or the commodity itself is perishable.

10 Thus product A may consist of n … rtons at x miles per hour between given points, product B of n … r tons at x miles per hour between the same points, product C of t tons at z miles per hour from one point of origin to other points n … r miles distant. This is an over-simplification to the extent that there are qualitative differences in the measure of distance arising from the nature of the terrain, whether the direction is with or against the stream of traffic, etc.

11 Generally one would expect products to be complementary until the capacity of plant (track, motive power, and rolling stock) is approached, when they become competitive. In the former case it is quite conceivable that the separable cost of product B may fall to zero when the quantity of product A is increased. Complementarity is the more common pattern since railways usually operate at less than full capacity. For most utilities demand fluctuates and production and consumption are instantaneous.

12 This raises an interesting question: at what point do freight rates on export goods constitute a hidden tax or subsidy?

13 It has been established that setting prices proportional to marginal cost will not satisfy the conditions for maximizing welfare.

14 Thus the railways have increased speed of service by instituting a collection and delivery at the consignee s door; road carriers have increased the territorial reach of their operations and the size and capacity of their vehicles.

15 Attempts by competitors to differentiate products to the consumer beyond weight, speed, and distance are not considered here.

16 For a discussion of the influence of transportation charges on the location of industry see Hoover, E. M., The Location of Economic Activity (New York, 1948), chaps. 2-4.Google Scholar

17 Similarly communication services offered to the public are produced jointly with internal communications required in railway operation.

18 Actually most railway statistics (e.g. percentage of loaded to total car-miles, car-miles per serviceable car-day etc.) are designed to show the degree of utilization of capacity rather than an aggregate of output.