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Transport: The movement of people and goods between places for personal or business reasons

Transport Infrastructure: Permenent installations needed for firms to provide transport services

Derived Demand: Where the demand for a good or service arises from the demand for another, final good or service.

Normal profit: The minimum level of profit required to keep resources in their current use (best oppurtunity cost)

Economies of scale: An increase in scale of operations or expansion of output leads to a decrease in LRAC.

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  • Predict future infrastructure network requirements and identify potential bottlenecks and conjestion.
  • Assist in policy making in relation to externalities (CO2 emmissions, demand for car e.g. excise duty on fuel.)
  • Cost Benefit Analyses 
    • Taking account the full costs and benefits of a decision
    • Compares money values of social costs and benefits to determine whether a project should go ahead
    • Done by: Identifying all C&B, establishing a shaddow prices, forcasting for the future and compare the present C&Bs. Only projects with a positive net benefit will go ahead.


  • Historical time series data
  • Trend line
  • Seasonal, random and cyclical fluctuations

They are estimates and assumptions so there will be uncertainties. For example technology may advance and change the future estimates etc.

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Economies of scale

Purchasing economies: Bulk buying -> fall in costs of inputs...

Managerial economies: Managers's saleries are fixed costs therefore will be spread over output. Also specialists can be hired which can increase productivity.

Financial economies: Bigger firms can borrow at lower interest rates

Technical economies (economies of increased dimensions): Bigger firms with larger output can use e.g. bigger vans, spreading the costs

Risk Bearing economies: Bigger firms can be safer from risk failure e.g. recessions and venture losses

Diseconomies of scale:

  • Communication problems due to the massive size of the firm leading to a decrease in productivity etc.
  • Workers may feel isolated from the objectives of the company -> a fall in motivation and fall in productivity etc.
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Barriers to entry (MELCSIL)

M- Marketing barriers (e.g. strong brand names)

E- Economies of scale (Existing firms may have low LRAC)

L- Legal barriers (e.g. Bus Operators licence)

C- Capital/ Set up costs

S- Sunk costs (could be linked to marketing costs)

I- Intimidation (e.g. predatory pricing)

L- Limited access to vital resources e.g. Landing spots

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Perfect competition


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Perfect Competition


  • No product differentiation
  • No barriers to entry
  • Lots of small firms
  • Normal profits are made
  • Excess profit can't be made as new firms are attracted instantly by it and compete it away.
  • There is no product differentiation.
  • The firms take its price from the marker when its produces profit maximising output (MC=MR)
  • AC is minimised and so productive efficiency is achieved.
  • When Q2 is produced and price = p2, P=MC and therefore allocative efficiency is achieved.
  • When AC= AR normal profit is made.
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Monopolistic competition


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Monopolistic competition


  •  Many producers (low concertration ratio)
  • Some product differentiation
  • Producers are 'price makers' in the short run.
  • Barriers to entry and exit are low.

Short run

  • When a profit maximisng firm produces Q AR>AC and so excess profits are made. 

Long run

  • In the long run when AC=AR firms produce Q1 (profit maximising output) and normal profit is made. (Excess profits are competeted away)
  • AC isn't maximised and P>MC so productively and allocatively inefficient.
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  • Non price competition (e.g. Some product differentiation)
  • A few large firms (High concentration ratio)
  • Significant barriers to entry

Oligopoly firms may collaborate (and act like a monopoly, obtaining monopoly prices and profits) e.g. Energy companies and local bus.


Oligopoly firms compete on price so that price and profits will be the same as a competitive industry e.g. Supermarkets

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  • One larger firm dominates the market
  • High barriers to entry
  • Economies of scale -> dynamic efficiency gains i.e. LRAC are reduced -> increased profits per unit which is reinvested to increase efficiency and decrease price in the LR.
  • Few substitutes, so MC=MR can be set to maximise profit but where AR>AC excess profits are made in the SR and LR.
  • AC aren't minimised and therefore it's productively inefficient.
  • P>MC so is allcoocatively inefficient
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Monopoly and a competitive market

For consumers:
Increased output (Qm->Qc) leads to an increase in choice. Prices should fall as profits are competed away and there will be an increased consumer surplus.

For Profit:
Profits will be competed down towards equilibrium (Pc & Qc) where AR=AC and normal profits are made.

Economic effciency:

  • Increased output (Qm to Qc) leads to decreased AC i.e. increased productive efficiency
  • Increased competition leads to a fall in price (Pm to Pc) creating increased allocative efficiency as price falls towards MC.
  • To keep costs low in the LR there needs to be increased investment and therefore increased dynamic efficiency. (However it could be said as profits are competed away firms have less money to reinvest so it may fall).
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Positives of a Monopoly

Economies of scale: The monopoly may have lower LRAC than smaller firms so a higher level of productive efficiency could be achieved- lower unit costs -> fall in prices. (this is strongest for a natural monopoly) If competetion increases then Q will fall for each firm leading to an increase in price i.e. AC will be lowest with one firm producing all the output e.g. rail tracks.

Costestable market: If there are no significant barriers to entry or exit (e.g. no sunk costs) then the fear of new firms entering the market via 'hit and run' competition forces the incumbent to act 'as if' it faced competition. This will compete profits towards normal profit. e.g. The European low cost airline market is derregulated and cotestable.

Fear of intervention by competition authorities: BAA was broken up by the competition commission in 2007 as they controled 90%of all flights form southern England

Investment/ creative destruction: Resources and incentive to increase dynamic efficeny through research and development decrease.

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Natural Monopoly


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Natural Monopoly

  • Argument for economies of scale (argued on positives of monopoly page)
  • Continuing economies of scale
  • Profit maxinmisers would produce Q1 (MR=LRMC) and charge P1 (AR>AC) creating excess profits.
  • Govt. may choose Q2 (allocatively efficient level where P=LRMC) and increase productive efficient LRAC<Q1. Although a subsidy would be needed as AC> AR at Q2.
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Profit maximisers

  • Maximise profits in order to maximise the return to shareholder so share prices increase creating and increase in equity capital.
  • Increased re-investment leading to increased dynamic efficieny and so increased productivity and competitiveness. This will reduce costs and prices in the LR.
  • Firms must produce quality service to consumers at the competitive price MC=MR.


  • MC=MR may not be known
  • Profit satisficing is more realistic (managers try to satisfy consumers, workers and shareholders etc.) 
  • Managers may not want to profit maximises.
    • Cost cutting measures could be saftey risk.
    • Competition commission may investigate.
    • Threat of takeover
    • May elicit a strong competitive reaction e.g. price wars
    • May attract new entrants (SR increased profits -> LR decreased profits)
  • Predatory pricing (SR fall in profits) -> competition being driven out (LR profit maximising)
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Advantages of Privatisation

  • Increased competition leading to increased incentive for efficieny -> fall in unit costs -> increased productive and allocative efficiency.
  • Profit motive: Only profitable invetsments are undertaken leading to increased productivity -> fall in operating costs and increased quality to increase custom -> increased (all) effciency.
  • More motivated managers: Increased profitablity and decreased costs or share holders will exert pressure e.g. fire people, where as with state owned eneterprises they might be expected to maximise welfare.
  • Decreased cost to govt. as increased efficieny and decreased subsidies.
  • Consumers should benefit from decreased price, increased quality and increased choice.
  • Increased investment through shares.
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Disadvantages of Privatisation

  • Competition may not increase- monopolies may occur e.g. rail services 'open access' competiton is limited and so recieves indirect competition e.g. via bus- Price may not fall and there will be no/few efficiency gains. e.g. fares of bus and rail have risen since privatisation
  • Profits may be given to shareholders rather than being reinvested.
  • Market failure (positive and negative externalities are ignored so allocative inefficiencies occur)
  • May prioritise profits over saftey/ service levels
  • Decrease in workers pay and conditions
  • Natural monopolies argument (...)
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Local bus deregulation

  • Decreased barriers to entry lead to increased constestability (as they abolished RSL)
  • Abolished price controls on routes and cross subsidisation on unprofitable routes made prices reflect costs. (Subisidies are still given to 'socially necessary' routes)
  • Competition was introduced tendering for subsidies to run loss making route


  • Intial duplication of services on profitable routes lead to increased conjestion and therefore increased negative externalities and allocative inefficiencies.
  • Non profitable routes were cut eventhough they were 'socially desirably' which lead to decreased accessability.
  • Oligopoly/ local monopolies became common as they can increase barriers to entry e.g. economies of scale and intimidation
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Negative externalities

Why put a monetary value of neg. ext.?

  • To establish the correct level of taxes to fully internalise the external costs (cost of UK road traffic conjestion is £25 billion)
  • Full CBA of construction of new infrastructure


  • Compensation criteria- i.e. repairing damage done by neg. ext.
  • Establish a cost in terms of loss of output
  • 'Willingness to pay' to avoid neg. ext. e.g. a view being destroyed.
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(Neg. ext. diagram with S shifting in)

  • Examples: Vehincle excise duty (class A pay less than say M), Excise duty on fuel (not airlines), APD, VAT on cars
  • Increased cost of motoring will internalise external costs.
  • Can be targeted at the biggest polluters.
  • Incentive for manufacturers to increase vehicle efficiency
  • Increases prices for cars will decrease demand and increase demand for substitutes such as bus and rail


  • It's difficult to determine the right level.
  • Depends on the extent of the tax (...)
  • Depends on PED
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  • Demand and supply diagram with suply shifting in.
  • Limiting supply with increase firms costs and therefore reduce their willingness to supply (shift in of S from S1 to S2) moving quantity to a more socially optimal level i.e. output will fall from Q1 to Q2 as price increases from P1 to P2.
  • Examples: EU legislation e.g. 130g CO2 per km across a manufacturers fleet, London's low emissions zone ( vehicles over 3.5 tonnes, which don't meet European standards are charged £200 per day)
  • Keeps pollution at an acceptable level.
  • Theoretically can be set at a socially acceptable level where MSC=MSB
  • Can decrease emissions quickly unlike education


  • Expensive to police
  • Depends on the level set how effective it will be.
  • May increase barriers to entry for new firms and small companies may leave the market leading to less competition...
  • No incentive to decrease emissions further when targets have been met
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Trans Atlantic Air transport deregulation

  • Private benefits
    • Increased revneue for airline (£26 m)
    • Decreased barriers to entry -> increased competition (...)
    • Increased choice for consumers
  • External benefits
    • 80 000 jobs in airlines and other ralted industries
    • Other EU businesses will see increased trade (e.g. tourist sector)
  • Private Costs
    • Increased competition will decrease profits and decrease investment (...)
  • External costs
    • Increased atmospheric pollution
    • Increased noise pollution
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  • D and S diagram with shift out in S 
  • Decreased operators costs lead to increased supply (S1 to S2) and decreased price (P1 to P2) creating an increase in Qd (Q1 to Q2)
  • Increased D for bus or rail leads to decreased D for car thus making the transport market more sustainable
  • Encourages operators to provide services on non commercial routes
  • Make PED for car more elastic as bus/train become better substitutes
  • Decreased conjestion as buses make better use of road space


  • It's difficult to find the right elvel
  • PED of public transport
  • YED (Increased Y leads to decreased D)
  • XED sensitivity and 'park and ride' mean buses are compiments to car so as D for bus increases, D for car will also increase 
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Road pricing

  • Internalises external costs and makes the polluter pay
  • Can be varied and flexible to target certain times and places
  • Can be hypothecated to pay for improvements to public transport -> increased quality of substitues and increased XED.
  • Success in Durham- cars entering the city centre feel from 2000 per day to 200 per day after 3 months. This progress hasn't been found in London but this can be put down to other factors such as increased road works.
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Sustainability: Meeting todays needs without compromising future generations ability to meet their needs.

Decreased demand for road transport (particularly private car) and increased demand for more sustainable modes e.g. cycling, walking and public transport (like bus/train)

2004 Future of transport white paper:

  • Sustained investment over the long term (£1.7 billion) 
  • Reorganising rail
  • Better traffic management
  • Tolling new roads
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Integrated transport policy (WHEA)

What: It's an approach that attempts to link different modes of transport i.e. intermodal

How: Minimising the inconvinience and cost of switching modes in a journey

Examples: Interchanges (rail to road), Park and ride etc.

Analyse: Why the examples minimise inconvinience/ cost and so increase willingness and ability to switch modes

Can be done by:

  • Better info for passenegers
  • Network/ 'through ticketing' e.g. oyster card
  • Transport interchanges
  • Connecting services better
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