Is Freight Too Cheap

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Is Freight Too Cheap??

• Douglass B. Lee, Jr.
• Transportation Research Board Annual Meeting
• January 2003

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Topic

• Is Freight Too Cheap?
• i.e., is the price of freight transportation to
  the user or shipper too low?
• What is the correct price?
• Criterion economic efficiency
• Should government seek to keep transportation
  prices artificially low?
• No, but not something I will try to cover right
  now

3
Recommended Reading

• TRB Special Report 271 Freight Capacity in the
  21st Century is my source text and launching
  pad.
• wherever capital investment is mentioned, it is
  emphasized that revenues should come from user
  charges

4
Some Symptoms

• growing congestion on some highway links
• slowing in the rate of additions to capacity
  (growth in highway VMT exceeds growth in lane
  miles)
• rail infrastructure has been downsized, and
  suffered large service disruptions from mergers
• congestion at terminals and border crossings
• lengthening lead times and rising costs of
  infrastructure projects
• freight-passenger conflicts in cities (loading,
  drayage, ROW, truck and rail externalities)
• unfunded needs such as for port infrastructure

5
Public/Private Sector Roles

• Transportation is complex mix of public and
  private
• provision of infrastructure (both)
• operation of facilities (both)
• financing of capital costs (both)
• collection of user fees (both)
• regulation to control environmental
  externalities, ensure safety, protect consumers
  from monopoly power, control international
  commerce (governments)

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Theory (Efficiency)

• Microeconomic theory
• (1) Price at marginal cost in the short run,
  ensuring at the margin that each usage pays for
  the immediate consequences (to society) of that
  use.
• (2) In the long require that firms pay all their
  costs from revenues they receive for the product
  or service they supply.

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• Under reasonable conditions (CRTS), these
  conditions are compatible
• short run costs rise above average variable cost
  as capacity is approached.
• multipart and discriminatory pricing are
  permitted and desirable (e.g., negotiated
  contracts, yield management).
• Evidence of price too low or too high is derived
  from market characteristics, rather than
  comparing an absolute level against a norm
• by looking at distorting influences, we can
  estimate the direction and magnitude of deviation
  of price from the efficient ideal.

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Interpretation of LR Costs

• All costs that would be incurred by a private
  firm in doing business
• operation
• capital (including borrowing or ROR)
• general taxes (income, sales, property)
• Plus externalities

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Transportation Market
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Price Below SR/LR Cost

• Direct Subsidy payments to suppliers to cover
  costs not recovered from consumers
• e.g., transit capital and operating costs
• government grants to highway agencies
• In-Kind Subsidy provision of service to
  suppliers at a price below cost to provide
• e.g., highway services to trucks at below cost
• favorable borrowing rates, risk assumption
• tax exemption

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Examples

• Highways
• prices too low in short run where there is
  congestion.
• insufficient user revenues in long run to cover
  even government expenditures (about 25
  shortfall).
• other costs (tax expenditures, borrowing subsidy,
  lack of ROI, air and noise pollution) raise
  shortfall to about 15 cents per mile.
• if revenues lt LR costs, then either (1) prices
  are too low, (2) capacity is too large, or (3)
  both.

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Bostons Central Artery Project (Big Dig)

• 7.5 mile vehicle trip has a long run cost for
  infrastructure alone of about 20, almost none
  paid by users for use of the facility

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• Highways (contd)
• new projects that could not possibly recover
  their costs from users seem excessive.
• even toll roads cannot recover their full costs,
  and they benefit from a network of underpriced
  feeder roads.
• railroads pay market rates for capital and also
  pay local property taxes, but not sales taxes.
• trucking SW regulation is not especially
  binding, and deregulation of routes and prices
  has lowered costs of drivers while improving
  productivity

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• Inland Waterways
• excluding Great Lakes shipping, inland waterways
  account for 11 of ton miles but only 1 of
  freight expenditures, i.e., it is cheap
• users (e.g., barge operators) pay only a tiny
  share of capital or operating costs of the
  facilities, yet are now demanding the doubling
  lock length from 600 to 1200 feet so they wont
  have to break tows in half.
• no congestion charges or other fees directly
  related to usage that would lead to more
  efficient behavior
• ACE estimates benefits of upgrade at small
  fraction of capital costs

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• Ports
• ports have unused capacity, receive funding from
  government sources, charge ships very little.
• ports are reluctant to raise fees for fear of
  diverting traffic to other ports.
• monopolistic shipping lines game ports to
  overprovide capacity.
• ports want expanded facilities and deeper
  channels to handle bigger ships, paid for by the
  federal government.
• ports also want direct access to railroads for
  double-stack container trains.
• Boston has wisely decided to retire from the
  field.

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Government Failure

• Government Supplier
• investment decision ostensibly consistent with
  BCA, but practice is weak
• political pressures overwhelm even those agencies
  seeking to be efficient
• result is underpricing combined with investment
  to satisfy peak demand, using general public
  revenues

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• Government as Financier
• private firms seek market advantage through
  government action (rent seeking)
• pressure to provide subsidy for public good,
  stimulate economy, just to get started, etc...
• each subsidy expands constituency to further
  expand the subsidy
• easier to provide countervailing subsidy so as to
  level the playing field than to eliminate the
  subsidy to all players

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Efficient Results

• Highways higher user charges, smaller network
• Inland Waterways major consolidation of network,
  much higher user charges
• Ports smaller number of perhaps larger ports,
  much higher fees on ships
• Railroads still rationalizing network, but on
  track
• Airports higher landing fees, especially at
  congested airports.