Transport Flashcards
Market failure
Where the market mechanism fails to allocate resources efficiently
Barriers to entry
High set up costs Economics of scale Legal barriers Brand loyalty Predatory pricing Intimidation
Features of a monopoly
High concentration ratio
High barriers to entry and exit
Supernormal profits in the long run
Allocatively and productively inefficient
Benefits of a monopoly?
Economies of scale = lower unit costs
Supernormal profits used to fund R&D
Can achieve dynamic efficiency gains
Potential for efficiency to maximise profits
Price discrimination
Where a monopolist charges different prices for the same product in different markets
Conditions needed for price discrimination?
Firm is a price maker
Firms can create sub markets to prevent resale
Different PED in each sub market
Arguments for price discrimination?
Reduces demand at peak time
Output is higher than with single pricing
Some consumers pay lower prices than with single prices - increasing consumer surplus
Firms may use higher profits to reinvest, leading to potential dynamic efficiencies
Arguments against price discrimination?
Some pay higher than with single pricing, decreasing their consumer surplus
Monopolists increase prices in markets with inelastic PED, so they extract consumer surplus from buyers as increase their profits
Arguments for road pricing?
Generates revenue for hypothecation
Forces polluters to internalise their externalities
Encourages modal shift
6 arguments against road pricing?
Must be set at a level that internalised the externality
Requires substitutes for modal shift
If PED = inelastic = ineffective
May displace traffic
High set up, maintenance and enforcement costs
Regressive
6 arguments against subsidies?
Only effective if passed on to consumer
If PED = inelastic = ineffective
Depends on size of subsidy
Other factors including quality impact consumer behaviour
May encourage x inefficiencies - firms use subsidy to cover organisational slack
Opportunity cost to government
Benefits of regulation?
Set clear standards for activities to avoid market failure
Revenue from penalties can be hypothecated
Fines give economic agents incentives to comply
Can be introduced quickly and at little cost
Drawbacks of regulation?
If penalties are too low people will continue
Costly to enforce
May be set at the wrong level
Minimum efficient scale?
The lowest level of output at which full advantage can be taken of economies of scale, where LRAC is minimised
Integrated transport policy
One that encompasses all modes of freight and passenger transport
