The economics of transport pricing This paper gives an overview of the economics of transport pricing and provides some basic understanding of key issues important for prices in transport markets. It addresses a range of complexities that arise due to the nature of the cost structure and different market conditions generally observed in the transport sector. Several transport pricing objectives can be distinguished, such as economic efficiency, profitability and cost coverage. Economics will usually argue that the pursuance of economic efficiency should take precedence. This efficient price (equal to marginal social costs) will only prevail as a market equilibrium under certain conditions, i.e. all other markets have also efficient pricing, there are no constraints on transport prices and market failures are non-existing. In most cases, however, actual transport prices deviate from marginal costs due to specific transport market conditions, which include imperfect competition (monopoly), increasing returns to scale and externalities (of which congestion is most particular). Besides these reasons, there are also constraints (e.g. practical and legal) that makes it difficult for a regulator to resort to marginal cost pricing. The regulator has then obviously to resort to 'second-best' pricing: setting prices that are available optimally under the constraints applying. Examples of second-best study issues include the problem of networks and the interactions with other markets or sectors. ft appears that second-best prices are more difficult to determine and implement and may lead to considerably lower welfare gains compared with first-best prices. (Author/publisher)
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