This research project has examined at more comprehensive and detailed level than most previous studies, the average and marginal social costs of road and rail transport. These estimates are compared with payments, mainly through rail fares and fuel tax, made by transport users. The study uses the DETR's traffic database and estimates of speed by road type, area type and time of day to derive estimates of congestion costs. Using previous studies carried out by the consultants and values from a range of sources, estimates of the environmental costs of road and rail traffic have been added to the track and congestion cost calculations.
This project follows a recommendation in the 1999 SACTRA Report, Transport and the Economy. This recommendation stated that the Department should move towards providing official estimates of the relationship between the prices and marginal social costs in different classes of journey. It estimates the costs of each of the main modes of surface transport in the UK, including track costs, congestion costs, environmental costs and an element of accident costs. It also assesses the extent to which costs, both at marginal and aggregate levels, are covered by payments made by users.
This project is an analysis of two sets of information that may be used in a complementary way for transport policy development in relation to charging, taxation and subsidy. The two types of information provide economic efficiency and cost coverage perspectives for the road and rail sectors. Results for 1998 are presented for Great Britain.
- The efficiency perspective is given by the comparison of marginal costs and revenues. For example if prices are set at the cost of a freight tonne kilometre, journeys for which a firm's benefit exceeds the cost imposed on the rest of society will not be deterred. Conversely, travel when the benefit to the firm is less than the social cost imposed will be discouraged. Therefore setting a price equal to marginal cost thus maximises economic welfare for society as a whole.
- The cost coverage perspective, provides a different set of evidence based on the comparison of fully allocated costs and revenues. Policy-makers have a legitimate interest in the comparison between economic costs and revenues associated with the road and rail sectors. The resource needs of these modes or the resources that may be generated from them, need to be balanced with the resource requirements of other sectors of the economy. A comparison between the total social costs imposed by road and rail users as a whole on the of society and the revenues raised can support such considerations. Although many of the costs of the transport sector are joint costs, i.e. costs that cannot be uniquely attributed to any one vehicle class or train type, the fully allocated cost approach seeks to compare social costs and revenues for each vehicle class or train type. Thus the marginal costs approach presents an efficiency perspective whilst the fully allocated cost approach provides a social cost coverage perspective.
There are two ways in which the marginal cost and fully allocated cost approach may be combined.
The first approach to combination is a political approach. Politicians may choose to set a cost coverage target for the road and rail sectors and then design a pricing system that maximises economic efficiency taking into account this constraint. One example of the outcome of such a system may be the use of the two–part tariffs, as currently used for rail track access charges. This involves a variable component that reflects the marginal cost
The report for the project indicates a number of policy implications as the following questions to policy makers:
- What is the direction of change in prices if existing charges are to be based on marginal costs?
- Does there appear to be a need for the introduction of new pricing instruments in the road sector?
- Are current levels of subsidy justified on economic efficiency grounds?
- How do weighted short run marginal costs compare to charges for the road and rail sectors at the national level?
- How do fully allocated costs compare to charges for the road and rail sectors at the national level?
- If the overall cost are apportioned to different vehicle categories, how do the allocated costs by vehicle compare to revenues?