0-6628-P1 
                          
                          
                          
                         THE ECONOMICS OF TRANSPORTATION SYSTEMS: 
                         A REFERENCE FOR PRACTITIONERS 
                          
                          
                          
                          
                         Dr. Kara Kockelman  
                         T. Donna Chen 
                         Dr. Katie Larsen 
                         Brice Nichols 
                          
                          
                          
                         TxDOT Project 0-6628: Economic Considerations in Transportation System 
                                                              Development & Operations 
                          
                          
                          
                         JANUARY 2013 
                          
                          
                         Performing Organization:                                         Sponsoring Organization: 
                         Center for Transportation Research                               Texas Department of Transportation 
                         The University of Texas at Austin                                Research and Technology Implementation Office 
                         1616 Guadalupe, Suite 4.202                                      P.O. Box 5080 
                         Austin, Texas 78701                                              Austin, Texas 78763-5080 
                                                                                           
                         Performed in cooperation with the Texas Department of Transportation and the Federal Highway Administration. 
       The Economics of Transportation Systems: 
       A Reference for Practitioners 
             
       January 2013 
       University of Texas at Austin 
       Dr. Kara Kockelman, T. Donna Chen, Dr. Katie Larsen, and Brice Nichols 
        
        
        
        
        
        
        
        
        
        
        
        
        
       Sponsored by the Texas Department of Transportation 
        
       The authors appreciate all the contributions to this research of multiple individuals. These include Duncan 
       Stewart, Project Director, who provided much guidance, feedback, and support; the Project Monitoring 
       Committee members, particularly Matt MacGregor and Ron Hagquist, for their regular feedback; Dr. 
       Fernanda Leite, Sami Kolahdoozan, Dr. Leigh Boske, YiYi Wang, and Jay Chmilewski for their various 
       contributions to the Reference’s draft content; Maureen Kelly for editorial development and design; and 
       Annette Perrone and Stefanie Pascacio for their editorial assistance. 
         
       Table of Contents 
       Introduction 
        Economics as a Tool for Transportation Decision-making .........................................................2 
        Reference Overview ....................................................................................................................3 
       Chapter 1. Costs and Benefits of Transportation 
        1.1 Introduction ........................................................................................................................ 1-1 
        1.2 Internal Costs and Benefits ................................................................................................ 1-3 
          Accounting Costs ................................................................................................................. 1-3 
          Capital vs. Operating Costs .................................................................................................. 1-3 
          Marginal vs. Average Costs ................................................................................................. 1-6 
          Total Costs: Fixed vs. Variable, and Short Run vs. Long Run .......................................... 1-11 
          Opportunity Costs .............................................................................................................. 1-12 
        1.3 External Costs and Benefits ............................................................................................. 1-17 
        1.4 Summary .......................................................................................................................... 1-21 
        1.5 An In-Depth Look ............................................................................................................ 1-23 
          Estimating Value of Travel Time (VOTT) ........................................................................ 1-23 
          Estimating Value of Reliability (VOR) ............................................................................. 1-23 
          Cost Functions and Returns to Scale in Production ........................................................... 1-24 
        1.6 References ........................................................................................................................ 1-25 
       Chapter 2. Pricing of Transportation Services 
        2.1 Introduction ........................................................................................................................ 2-1 
        2.2 What is an Optimal Price? ................................................................................................. 2-1 
          Maximizing Profit ................................................................................................................ 2-3 
          Maximizing Social Benefits ................................................................................................. 2-4 
          Yield Management ............................................................................................................... 2-5 
        2.3 Roadway Pricing ................................................................................................................ 2-7 
          Short-Run Marginal Cost Pricing ........................................................................................ 2-7 
          Long-Run Marginal Pricing ................................................................................................. 2-9 
          Static vs. Dynamic Pricing ................................................................................................... 2-9 
          Second-Best Pricing ........................................................................................................... 2-10 
          Implementing Roadway Pricing ........................................................................................ 2-13 
          Freight Movements ............................................................................................................ 2-18 
        2.4 Road Pricing’s Impacts on Equity ................................................................................... 2-20 
        Measures to Improve Horizontal Equity ............................................................................ 2-21 
        Measures to Improve Vertical Equity ................................................................................ 2-21 
        2.5 Summary .......................................................................................................................... 2-23 
        2.6 References ........................................................................................................................ 2-24 
      Chapter 3. Regulation and Competition 
        3.1 Introduction ........................................................................................................................ 3-1 
        3.2 Regulations ........................................................................................................................ 3-1 
        Environmental ...................................................................................................................... 3-2 
        Safety ................................................................................................................................... 3-5 
        Workers’ Wages ................................................................................................................... 3-8 
        3.3 Deregulation ....................................................................................................................... 3-8 
        Railroad and Motor Carrier Deregulation ............................................................................ 3-8 
        Airlines Deregulation ......................................................................................................... 3-10 
        3.4 Competition ..................................................................................................................... 3-12 
        Competition in Public Transit Systems .............................................................................. 3-12 
        Competition between Bidders ............................................................................................ 3-13 
        3.5 Summary .......................................................................................................................... 3-13 
        3.6 An In-Depth Look ............................................................................................................ 3-15 
        Regulatory Evolution ......................................................................................................... 3-15 
        3.7 References ........................................................................................................................ 3-17 
      Chapter 4. Movement, Transportation, and Location 
        4.1 Introduction ........................................................................................................................ 4-1 
        4.2 Accessibility and Mobility ................................................................................................. 4-1 
        4.3 Transportation and Location Choice .................................................................................. 4-1 
        Theories of Business Location ............................................................................................. 4-2 
        Theories of Residential Location ......................................................................................... 4-5 
        Policy Impacts ...................................................................................................................... 4-7 
        4.4 Transportation and Land Values ........................................................................................ 4-7 
        Theoretical Expectations ...................................................................................................... 4-7 
        Rail Transit ........................................................................................................................... 4-8 
        Highway Investment ............................................................................................................ 4-9 
        4.5 Transportation and Wages ............................................................................................... 4-10 
        4.6 Transportation and Economic Development ................................................................... 4-11 
        Economic Impact of Relief Routes .................................................................................... 4-13