Marginal costs are the costs generated by an additional transport unit (vehicle/train/barge/ship/plane) when using infrastructure. I begin by assuming that the capacity of infrastructure is taken as given.
This means that there are some costs, which are “fixed” (the costs of infrastructure construction is the simplest example) and others, which are variable. Of the latter, some will vary only loosely with the level of traffic.
In other cases there are clear links with traffic flows and between the individual transport units and the costs imposed. It is this subset of variable costs, which are defined as marginal costs.
Whilst some of these costs are reflected in current prices (and are “internal costs”), there are many costs, which are not borne by those who cause them, but affect third parties and so have not been “internalised” in the charges paid. Most of these “external costs” are marginal social costs.
3.2.1 Types of External Costs
The progress made in evaluating external costs of transport can best be followed on the base of the UIC (Union International des Chemins de Fers is the international association of the railway companies), which have been published in 1995 and 2000.
While the UIC 1995 study only looked at four effects (accidents, noise, air pollution and climate change), the updated study UIC 2000 gives a considerable extension of external cost accounting.
Impacts on nature and landscape, separation of urban areas, costs from up-stream and down-stream processes and finally cost of congestion have been added (ROTHENGATTER, W., 2001)
3.2.2 Principle of Congestion Pricing
In this paper, I will introduce the marginal social cost price approach on external cost of congestion for example.
The basic justification is based on the concept of the “externalities” which drivers impose.
When a driver makes a journey s/he is faced with costs in terms of time and vehicle operating costs.
However, as demand increases, the addition of journeys will increase the costs faced by all other users of the facility.
The size of this effect is determined by the relationship of traffic speed to flow on the facility under consideration.
This external effect is not recognized by the individual driver in making decisions and hence may lead to decisions to travel where the benefits of the trip are less than the total costs which it generates.
The purpose of congestion pricing is to charge drivers an amount which represents this extra cost to the other which they cause, thus leading to travel decisions which are based on a correct calculation of the total costs involved i.e. travellers are faced with the marginal social cost rather than marginal private cost, though it must be recognized that congestion is only one external effect.
There is growing current concern about environmental externalities but this is not mentioned here.
3.2.3 Optimal Marginal Social Cost Pricing on Congestion
If we were obliged to pay the true marginal costs of the car journey, including the road provision, plus our social costs in terms of delays to other road users, perhaps we would make fewer car trips?
This is the basis of the economist’s solution to road congestion.
In the UIC 2000 study total, average and marginal costs have been calculated. Total cost calculation is based on aggregate figures and applies a top-down approach.
This means that overall costs are calculated by type of effects and then broken down to the transport unit by subdividing the cost figures by passenger/km or ton/km to result in average costs (ROTHENGATTER, W., 2001).
In the theory of optimal marginal social cost pricing plays an important role as it can be shown that in a perfectly competitive or in a perfectly centralized public regime prices would equal marginal costs if the infrastructure were optimally designed.
Although the concept of marginal costs looks simple, it is associated with a number of quantification problems. In the case of congestion costs it is necessary, for instance, to calculate the dead-weight losses (welfare losses through deviations from the socially optimal link loads)
Look at the figure 3.1 and let us see how we can analyse this technically:
Figure 3.1 Economic Definitions of External Congestion Costs
MSC: Marginal Social Costs, MSEC: = MSC –PC, PC: Private Average Costs, Q: Traffic Volume, W (Q): Demand Curve, D-G: Time Cost, G-H: Vehicle Operation Cost, H-E: Variable Road Maintenance Cost
Source: Transport Tutorial Association (1990), ROTHENGATTER, W. (2001).
The dead-weight loss (depicted by the area ABC in the figure above) can be interpreted as the loss of social welfare sub-optimal use of the existing based on de-central individual decision making not taking into account congestion externalities.
Suppose a marginal social cost pricing approach was adopted; the price would be OC and the flow, or demand, would be OE. Beyond that flow, every additional road user costs other road users (measured by the marginal social curve) more than his/her benefit (measured by the demand curve).
MSC(Q)
PC(Q) MSC(Q)
W(Q)
O MSC(Q*) MPC(Q)
E F
PC(Q) PC(Q*)
W(Q)
Traffic Volume q MSEC(Q*)
(Optimal Toll)
A B
C MSEC(Q)
D
H G
Moving from flow OF to flow OE will reduce costs by ECBF and benefits by only ECAF.
So if we did use a marginal social cost pricing policy, we would save resources equivalent to area ABC.
Price would be set equal to the marginal social cost OC, and flow would be reduced by EF, by imposing a charge of CD.
There will, of course, still be some congestion, since there would remain enough road users to cause delays to others, but economic theory tells us that resources are allocated efficiently, as the marginal social cost imposed by the user equals the benefits s(he) gains (Transport Tutorial Association, 1990).
This formal economic analysis shows the way in which the use of road space could be efficiently allocated by pricing.