Option traders incur which of the following types of costs by behavior
Price, cost and investment issues in transportation garner intense interest. This is certainly to be expected from a sector that has been subject to continued public intervention since the ninteenth century. While arguments of market failure, where the private sector would not provide the socially optimal amount of transportation service, have previously been used to justify the economic regulations which characterized the airline, bus, trucking, and rail industries, it is now generally agreed, and supported by empirical evidence, that the move to a deregulated system, in which the structure and conduct of the different modes are a result of the interplay of market forces occurring within and between modes, will result in greater efficiency and service.
Many factors have led to a reexamination of where, and in which mode, transportation investments should take place. First, and perhaps most importantly, is the general move to place traditional government activities in a market setting. The privatization and corporatization of roadways and parts of the aviation systems are good examples of this phenomenon. Third, there is increasing pressure to fully reflect the environmental, noise, congestion, and safety costs in prices paid by transportation system users.
Finally, there is an avid interest in the prospect of new modes like high speed rail HSR to relieve airport congestion and improve in environmental quality. Such a major investment decision ought not be made without understanding the full cost implications of a technology or investment compared to alternatives. This chapter introduces cost concepts, and evidence on internal costs. The chapter on Negative externalities reviews external costs.
In imperfectly competitive markets, there is no one-to-one relation between P and Q supplied, i. Each firm makes supply quantity decision which maximises profit, taking into account the nature of competition more on this in pricing section. In a perfectly competitive market, the supply curve is well defined. Much of the work in transportation supply does not estimate Supply-curve.
Instead, focus is on studying behaviour of the aggregate costs in relation to outputs and to devising the procedure for estimating costs for specific services or traffic. Transport economists normally call the former as aggregate costing and the latter as disaggregate costing. For aggregate costing, all of the cost concepts developed in micro-economics can be directly applied.
The production of transport services in most modes involves joint and common costs. A joint cost occurs when the production of one good inevitably results in the production of another good in some fixed proportion. For example, consider a rail line running only from point A to point B. The movement of a train from A to B will result in a return movement from B option traders incur which of the following types of costs by behavior A.
Since the trip from A to B inevitably results in the costs of the return trip, joint costs arise. Some of the costs are not traceable to the production of a specific trip, so it is not possible to fully allocate all costs nor to identify separate marginal costs for each of the joint products.
For example, it is not possible to identify a marginal cost for an i to j trip and a separate marginal cost for a j to i trip.
Only the marginal cost of the round trip, what is produced, is identifiable. Common costs arise when the facilities used option traders incur which of the following types of costs by behavior produce one transport service are also used to produce other transport services e.
The production of a unit of freight transportation does not, however, automatically lead to the production of passenger services. Thus, unlike joint costs, the use of transport facilities to produce one good does not inevitably lead to the production of some other transport service since output proportions can be varied. The question arises whether or not the presence of joint and common costs will prevent the market mechanism from generating efficient prices.
Substantial literature in transport economics Mohring, ; Button, ; Kahn, has clearly shown that conditions of joint, common or non-allocable costs will not preclude economically efficient pricing. External costs are discussed more in Negative externalities. Economics has a long tradition of distinguishing those costs which are fully internalized by economic agents internal or private costs and those which are not external or social costs.
The difference comes from the way that economics views the series of interrelated markets. Agents individuals, households, firms and governments in these markets interact by buying and selling goods are services, as inputs to and outputs from production.
A firm pays an individual for labor services performed and that individual pays the grocery store for the food purchased and the grocery store pays the utility for the electricity and heat it uses in the store.
Through these market transactions, the cost of providing the good or service in each case is reflected in the price which one agent pays to another. As long as these prices reflect all costs, markets will provide the required, desirable, and economically efficient amount of the good or service in question.
The interaction of economic agents, the costs and benefits option traders incur which of the following types of costs by behavior convey or impose on one another are fully reflected in the prices which are charged. However, when the actions of one economic agent alter the environment of another economic agent, there is an externality. An action by which one option traders incur which of the following types of costs by behavior purchase changes the prices paid by another is dubbed a pecuniary externality and is not analyzed here further; rather it is the non-pecuniary externalities with which we are concerned.
More formally, "an externality refers to a commodity bundle that is supplied by an economic agent to another economic agent in the absence of any related economic transaction between the agents" Spulber, The essential distinction which is made is harm committed between strangers which is an external cost and harm committed between parties in an economic transaction which is an internal cost.
A factory which emits smoke forcing nearby residents to clean their clothes, cars and windows more often, and using real resources to do so, is generating an externality or, if we return to our example above, the grocery store is generating an externality if it generates a lot of garbage in the surrounding area, forcing nearby residents to spend time and money cleaning their yards and street.
There are alternative solutions proposed for the mitigation of these externalities. Closer to our research focus, an automobile user inflicts option traders incur which of the following types of costs by behavior pollution externality on others when the car emits smoke and noxious gases from its tailpipe, or a jet aircraft generates a noise externality as it flies its landing approach over communities near the airport.
However, without property rights to the commodities of clean air or quiet, it is difficult to imagine the formation of markets. The individual demand for commodities is not clearly defined unless commodities are owned and have transferable property rights. It is generally argued that property rights will arise when it is economic for those affected by externalities to internalize the externalities.
These two issues are important elements to this research since the implicit assumption is that pricing any of the externalities is desirable. Secondly, we assume that the property rights for clean air, safety and quiet rest with the community not auto, rail and air users.
Finally, we are assuming that pricing, meaning the exchange of property rights, is possible. These issues are considered in greater detail in Chapter 3 where the broad range of estimates for the costs of the externalities are considered. Once having established the cost function it must be developed in a way which makes it amenable to decision-making.
First, it is important to consider the length of the planning horizon and how many degrees of freedom we have. For example, a trucking firm facing a new rail subsidy policy will operate on different variables in the short run or a period in which it cannot adjust all of its decision variables than it would over the long runthe period over which it can adjust everything.
Long run costs, using option traders incur which of the following types of costs by behavior standard economic definition, are all variable; there are no fixed costs. However, in the short run, the ability to vary costs in response to changing output levels and mixes differs among the various modes of transportation.
Since some inputs are fixed, short run average cost option traders incur which of the following types of costs by behavior likely to continue to fall as more output is produced until full capacity utilization is reached.
Another potential source of cost economies in transportation are economies of traffic density; unit cost per passenger-kilometer decreases as traffic flows increase over a fixed network. Density economies are a result of using a network more efficiently.
The potential for density economies will depend upon the configuration of the network. Carriers in some modes, such as air, have reorganized their network, in part, to realize these economies. The long run average cost curve, however, is formed by the envelope of the short run average cost curves. For some industries, the long run average cost often decreases over a broad range of output as firm size both output and capacity expands. This is called economies of scale.
The presence of economies at the relevant range of firm size means that the larger the size of the firm, the lower the per-unit cost of output. These economies of scale may potentially take a variety of forms in transportation services and may be thought to vary significantly according to the mode of transportation involved. The relationship between short and long run costs is explained by the envelope theorem. That is, the short run cost functions represent the behavior of costs when at least one factor input is fixed.
If one were to develop cost functions for each level of the fixed factor the envelope or lower bound of these costs would form the long run cost function. Thus, the long run cost is constructed from information on the short run cost curves. The firm in its decision-making wishes to first minimize costs for a given output given its plant size and then minimize costs over plant sizes.
In the diagram below the relationship between average and marginal costs for four different firm sizes is illustrated. Note that this set of cost curves was generated from a non-homogeneous production function. You will note that the long run average cost function LAC is U-shaped thereby exhibiting all dimensions of scale economies. Economies of scale refer to a long run average cost curve which slopes down as the size of the transport firm increases.
The presence of economies of scale means that as the size of the transport firm gets larger, the average or unit cost gets smaller. Since most industries have variable returns to scale cost characteristics, whether or not a particular firm enjoys increasing, constant or decreasing returns to scale depends on the overall market size and the organization of the industry.
The presence or absence of scale economies is important for the industrial structure of the mode. If there were significant scale economies, it would imply fewer larger carriers would be more efficient and this, under competitive market circumstances, would naturally evolve over time. Scale economies are important for pricing purposes since the greater are the scale economies, the more do average and marginal costs deviate.
It would, therefore, be impossible to avoid a deficit from long run marginal [social] cost pricing. Another note of terminology should be mentioned. Economics of scale is a cost concept, option traders incur which of the following types of costs by behavior to scale is a related idea but refers to production, and the quantity of inputs needed.
If we double all inputs, and more than double outputs, we have increasing returns to scale. If we have less than twice the number of outputs, we have decreasing returns to scale.
If we get exactly twice the output, then there are constant returns to scale. In this study, since we are referring to costs, we use economies of scale. The presence of economies of scale does not imply the presence of returns to scale.
Scale measures long-run fully adjusted relationship between average cost and output. Since a firm can change its size network and capacity option traders incur which of the following types of costs by behavior the long run, Economies of Scale EoS measures the relationship between average cost and firm size.
EoS can be measured from an estimated aggregate cost function by computing the elasticity of total cost option traders incur which of the following types of costs by behavior respect to output and firm size network size for the case of a transport firm.
Economies of scale EoS represent the behavior of costs with a change in output when all factors are allowed to vary. Scale economies is clearly a long run concept. The production function equivalent is returns to scale. If cost increase less than proportionately with output, the cost function is said to exhibit economies of scale, if costs and output increase in the same proportion, there are said to be 'constant returns to scale' and if costs increase more than proportionately with output, there are diseconomies of scale.
There has been some confusion in the literature between economies of scale and economies of density. These two distinct concepts have been erroneously used interchangeably in a number of studies where the purpose was to determine whether or not a particular mode of transportation the railway mode has been the subject of considerable attention is characterized by increasing economies or diseconomies of scale.