The authors of this paper argue that an important task of transport methodology is to adopt dynamic methods, where the response to policies is seen as a dynamic process. They consider what happens to consumer surplus if analysis of an equilibrium demand curve is replaced by a time-dependent adjustment process. Dynamic demand models have the advantages of corresponding more closely with human behaviour, including memories and delays in response to changes, and providing information about when effects occur. The results of static models are much less realistic. The authors' mathematical model shows that the dynamics of adjustment are important in determining the change in consumer surplus resulting from a change in costs, and that the use of a static elasticity generally overestimates or underestimates benefits or losses. Empirical estimates of income and cost elasticities are now being used to illustrate the implications of using dynamic formulations of consumer surplus calculations. Using static elasticities to assess a transport policy could wrongly estimate its impact. Thus the policy bias in current practice could overestimate the welfare loss in raising prices, and underestimate the welfare gain in reducing prices.
Abstract