Tronrpn Rn Vol. 9. pp 381-385 Perpamon Press 1975. Prmted m Great Bntam

BIBLIOGRAPHIC SECTION

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TWO INTRODUCTORY BOOKS IN TRANSPORTATION ECONOMICS

The Transport Problem, C. D. Foster, Croom Helm Ltd., 2-10 St. John’s Road, London, SWl1,2ndEdition,pp. 356,index, 1975f6.95 orf3SO(paper).

The Economics of the Transportation James T. Kneafsey. Firm, D. C. Heath & Co.,

Lexington, MA, pp. 125, index, 1974.

Reviewed by Kenneth Small, University of California, Berkeley, CA 97420, U.S.A.

Here are two books which give introductory treatments to important topics in transportation economics. A perusal of either arouses hope that they might go a long way toward filling the notable void of good undergraduate- level texts in the field. One longs, in the field of transportation economics, for a book which collects and systematizes the considerable advances of recent years, particularly the shift in emphasis toward closer ties with mainstream economics.

Foster’s book is a broad-ranging attempt to tie together the entire field of public policy toward inter-city ground transportation in Great Britain. The author covers in great depth a gamut of issues in costs, pricing. and investment in railroad and highway transportation. The book is lengthy, original. and full of personal interpretation. It is written from the perspective of one who is well-informed and personally involved in the arena of actual policy determination. To a considerable extent the revisions in the new edition document the success of the author in helping to bring about many of the changes advocated.

Kneafsey has a quite different, narrower, more academic, but no less valid approach. He examines that part of the U.S. transportation system operated by privately-owned common carriers, mainly from the point of view of the industrial organization subfield of economics. Thus the emphasis is on industry structure. performance criteria, and of course the central role played

by the regulatory commissions. The book is short, brief in its personal interpretation, but wide-ranging in its references to current research. No ivory tower dweller, Kneafsey demonstrates not only his economic literacy, but also a detailed knowledge of the industries upon which he focuses, and skill in extracting and manipulating data.

Neither book, however, pretends to do the whole job, and I find myself somewhat uncertain as to the perspective from which the books should be reviewed. Foster’s is a revision, quite plainly in the nature of 1975 retrospections on a 1963 text. Most revising is in the form of brief postscripts at the end of the chapters. (On would be well advised to read them first, since they often bear quite heavily on the adequacy or relevance of the body of the chapter.) The book draws almost exclusively from British inter-city experience; nevertheless it is clearly intended to be a useful introduction to basic theoretical principles, and thus presumably of interest to a present- day international audience.

Kneafsey does not claim his book to be a text (that designation is reserved for his forthcoming Transporta- tion Economic Analysis). What it does do is to treat, in a systematic introductory fashion. particular aspects of transportation economics: “It’s major thrust is the demonstration of how microeconomic theory applies to transportation markets” (Preface, p. XV). It is not clear

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just who the book is intended for. but certainly a large part of its potential market consists of students.

Both books, then, will be reviewed from the point of view of a teacher who might consider using them as textbook or supplementary reading for a course in transportation economics. It must be said further that this reviewer’s point of view is of necessity a product of the United States, which may cause Foster to be given a somewhat one-sided treatment.

Having said this, I may now state quite plainly that I believe both authors have failed in their undertakings.

Let us enumerate three basic goals which a text or introductory book aiming to condense a large field of study, in particular transportation economics, ought to accomplish: first, a clear exposition of the general principles derived from economic theory which should guide transportation investment, operation. and pricing; second, their application to detailed analysis of specific problems of current relevance; and third, by way of example, a critical evaluation of some past and present policies.

A striking characteristic of Foster’s book is its emphasis on the third of these goals. It contains extensive descriptions and criticisms which should prove of interest to students of the history of British transport policy, and which will help some readers to sharpen their ability to evaluate various popular arguments. Furthermore, many of the mistakes so laboriously dealt with are no doubt alive and kicking in various seats of power.

Nevertheless, a reader with much background in economics will find the veritable epic of bad policy somewhat painful to go through in detail. From the “simple solutions” of the first chapter to the complex Railroad Modernization Plan of 1954; from the claim that bad roads cause illiteracy to the “classification system” for highway investment priority: all portray errors to which a modem student of economics would hardly have been expected to succumb in the first place.

We can, however, excuse Foster for belaboring the obvious, since he skillfully uses his criticisms to expound the major principles which constitute his answer to the need for a guiding theory. These consist of two alternative criteria for decisions on transport policy, “profit maxim- ization” and “consumers’ surplus maximization,” the choice between them being left to a decision on political grounds.

The meaning of profit maximization is straightforward, but its motivation exposes a weakness in Foster’s technique of salvaging the “correct” principle from the wreckage of destroyed ones. For virtually no positive arguments are given for using profit maximization as a decision criterion in transport policy; it emerges rather as an attempt to impose some rationality on the historical chaos of alternative criteria. Indeed, this reviewer can see little to recommend it.

In contrast, the principle of “consumers’ surplus maximization” arises in a way more natural to econom- ists. Starting from the principle of “social surplus maximization,” which entails the familiar rules of marginal cost pricing and cost-benefit analysis for investment. Foster proceeds, through an insightful discus- sion of its weaknesses, to reject it on the grounds of

politically unacceptable consequences for income dis- tribution, and of administrative intractability. Its replace- ment, “consumers’ surplus maximization,” differs from it in two ways: the range of individuals whose benefits are to be considered is restricted to patrons of the transport system, and a zero-profit constraint is imposed. Since a number of clever attempts to return surplus profits to consumers by other than pricing means are considered and rejected, this principle requires average cost pricing.

To this reviewer, the consumers’ surplus criterion, which is virtually seized from thin air as an answer to the difficulties with social surplus maximization, is entirely unsatisfactory. If the latter principle is to be abandoned on distributional grounds, then distribution should be examined case-by-case. If classes of individuals are thought to receive benefits which are small or too difficult to calculate, they should be excluded on those grounds, not according to the extent to which they consume transporta- tion services.

Foster himself seems to reject his own criterion in many places, especially in the new 1975 material. In a postscript he admits its “great disadvantage, which on reflection seems to me overwhelming” (page 256), in its failure to deal adequately with road congestion. Another postscript explains at length that the arguments against marginal cost pricing are much weaker than when the book was first written. In his key theoretical chapter, the criterion’s implications for allocation of joint costs are explicitly rejected on grounds of “fairness,” and for it is substituted (with no justification other than “intuitive appeal”) a procedure which amounts to setting price proportional to marginal cost for each jointly-produced output. Later, an implicit rejection occurs in his advocacy of research to quantify social costs of noise and fumes.

Foster has commendably tried to formulate a criterion for public enterprise operation which can stand up in an imperfect world of governments which regard subsidies as signs of inefficiency. But the manifestly unsatisfactory implications to which it leads ought to suggest that the effort is misplaced: in a world plagued by such disastrous examples of average-cost pricing as congested urban highways, should we not instead argue that the constraints placed on the problem are the problem? Is it doubtful that some airtight sub-optimization rule is what governments really want’anyway; rules have a habit of being revised whenever their results conflict with prior expectations, enlightened or otherwise.

It must also be noted that, for a student, the inconsistencies and ad hoc adjustments to which the consumers’ surplus criterion leads must form an ex- tremely difficult path for learning basic transportation economics principles. Indeed, this reviewer could often not follow the discussion; for example when, in “the most important point of [Chapter 21” (page 43, the criterion is associated with a “consumers’ surplus rate of return” which can somehow aid in the evaluation of the operating efficiency of a transportation agency.

Turning to the analysis of specific transportation problems, one might hope that, despite its theoretical defects, Foster’s book would contain valuable insights into some of the questions which have sparked debate among transportation economists. Here is perhaps its

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greatest disappointment. It is marred by a number of seriously faulty analyses, and others which appear promising but stop short of fruition. In discussing these, I am hampered by a lack of certainty that I have always caught Foster’s meaning, having found the analysis frequently hard to understand.

The treatment of highway congestion pricing is. as Foster points out. of necessity unsatisfactory, since his theoretical framework rules it out. Thus the subject is not given the systematic treatment warranted by the well- developed theory found in such writers as Walters. Vickrey. Strotz, and Mohring. Yet Foster clearly under- stands and sympathizes with the idea of short-run marginal cost pricing. leading him to endorse many techniques proposed by A. A. Walters and others for implementing it.

The chapter on railroad costs quite rightly lays stress on the issue of determining and allocating joint costs. While persuasively arguing against the validity of British Railways’ distinction (in the 1950’s) between “direct” and “indirect” cost, Foster fails to make clear, at least to this reviewer, how joint costs should be treated. The confusion is exacerbated by the empirical assumption that joint costs are identical with fixed costs. an assumption challenged subsequently to the first edition by the work of Stewart Joy. All this is honestly pointed out in the postscript. but little is done to disentangle the theoretics! confusions.

Two other examples, from the chapter on highway costs, may be mentioned of analyses which are either faulty or unclear. Foster points out the pitfall of double-counting benefits. but mistakenly concludes that indirect benefits to non-users (e.g. freight customers or property owners) may be simply omitted, a conclusion valid only if supply and demand elasticities are such that those benefits are completely appropriated by highway users. As for the valuation of land taken for highways, Foster is quite clear that alternative use value is important, but I was simply unable to follow the complexities of what this implies for his two criteria.

There are several examples of topics which receive a promising but incomplete analysis. Foster argues convinc- ingly for making explicit all subsidies. defined with reference to those who would stand to gain or lose if a particular policy were discontinued. This peculiar defini- tion has the merit of focusing on the policy question of interest, but the weakness that its magnitude depends on the funobservable) decision criterion used by the firm or agency in question. One would like to see the implications of this concept drawn out.

An excellent chapter is devoted to an example of highway investment analysis. allowing the reader to discover just what data are needed to carry through a cost-benefit analysis from beginning to end. The example is dated. however, and the vast array of modern research methods and tools receive only a glimpse in the postscript. Again, a clear presentation is given of some of the issues and modern literature pertaining to the choice of a discount rate. but important aspects, such as those raised by Marglin and Baumol. are omitted.

A number of other important topics are omitted entirely. The inclusion in costing of “normal” business

and property taxes on publicly- or privately-owned transport firm assets is simply stated as an axiom. No presentation is given of the voluminous evidence on returns to scale in either railroad or highway investment, despite Foster’s recognition of the importance of this issue for his pricing criteria. Nowhere in the lengthy treatment of railroad costing procedures is there any discussion of statistical methods, nor is there a prescrip- tion for how to use accounting data so as to avoid the mistakes of the past. Issues in the valuation of accidental injuries and deaths receive minimal attention in the section on accident costs.

While granting Foster the propriety of making available once again a text long out of print, it still seems fair to complain of the patchwork nature of the result. The postscripts do serve to update the historical descriptions, but they are too brief to adequately update the analysis, and contain too few references to serve as a useful bibliography. Their chief value is to warn the reader of major. indeed devastating, weaknesses in the text. several examples of which have been pointed out in this review. Occasionally, as when Joy’s results on railroad fixed costs are reported, the postscript goes on to show how this new evidence modifies or invalidates portions of the text; but too many times the reader is left with nothing but the reassurance that Foster is honest enough to admit his mistakes.

Other revisions include updating figures (though in one case, Chapter 1, not the accompanying textual descrip- tion, resulting in some minor confusion). The theoretical chapter has been extensively rewritten, and a few examples and appendices altered.

Returning to Kneafsey, the main problem is that he does not apply economic theory to transportation issues; he sets them down side-by-side, with no apparent connection. In some cases the analysis consists of generalizations which could be. but are not, substantiated by reference to the theory.

In other cases, useful and relevant data are presented, but the necessary calculations to relate it to theory are not made. A good collection of statistics on market structure and rates of return in the railroad freight, trucking, and airline industries is presented in the second chapter, but the reader is left longing for some use of them, such as calculation of concentration ratios, comparisons with other industries, or even comparisons among the three industries covered.

The chapter on regulatory commissions, which a student of industrial organization will approach with relish as the key application to transportation, is a disappointment. Instead of a coherent analysis of regulation in transportation, it is an unorganized pop- pourri of topics receiving weak analysis. Discussion of ICC merger policy is essentially descriptive, except for a proposal for applying optimal control theory which is given no operational content. The ICC’s tendency toward fostering a cartel is an unsubstantiated generalization, as is the railroads’ failure to keep good management. A flow chart on the derivation of cost functions seemed to me too abstract to be of help, and the long listing of possible performance measures for transportation industries is specific but unmotivated.

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Like Foster, Kneafsey omits some important topics. Little is said about allocation of joint costs in railroad operations, or about the extensive literature on the magnitude of railroad fixed costs. The tradeoff between price and service quality, as developed by Douglas and Miller for airlines, is not examined. The effects of ICC policy on rail-truck competition is not treated, nor is demand for transportation modes.

Another major problem with Kneafsey’s book is the superficiality of the theoretical sections. Occasionally, as in the theory of firms with utility functions, we find impressive formulae but few clues as to their significance or potential use. More importantly, the theoretical topics unaccountably do not include the very field of economics which is central to the book, namely industrial organiza- tion! What basics there are will be found scattered unsystematically throughout the chapter on market structure. Theories of oligopoly are entirely absent; so are such basic industrial organization topics as barriers to entry, product differentiation, and measures of market concentration. The causal connections between market structure and performance, lying at the very heart of industrial organization, are alluded to but never fully explained.

Throughout the book Kneafsey’s style is disjointed, often making his points and their relationships unclear. One’s impression is that the author has bound together a series of topics about which he has some expertise, but has given little thought. Evidence of this is that one entire section, ostensibly Kneafsey’s description of some recent research on railroad cost functions, is in fact lifted almost word-for-word from the paper cited.

To this point I have concentrated on the failure of these two books to develop the potential of their distinct approaches. A word is in order concerning the relevance

of these approaches to the broader field of transportation economics.

Clearly one cannot expect a book to do everything, and if either had succeeded in its own framework it would have represented a real contribution. Yet each of these approaches has limitations. The most serious is Kneaf- sey’s restriction to private firms. In an industry where air carriers are dependent on elaborate publicly-built airport facilities, or where trucking firms use public highways (and share them with another transportation mode altogether), it is impossible to give a complete picture of the economic interdependencies involved without bring- ing in the public sector. This is perhaps clearest for the issue of rail-truck competition, an extremely important aspect of ICC regulatory policy which requires considera- tion of highway construction and maintenance costs, their allocation among different types of traffic, and cost- benefit analysis of highway investments.

Less serious is the emphasis by both authors on inter-city transportation, since urban transportation does involve a largely separate market, as well as different technology and cost functions. Yet there are connections such as airporr access, railroad piggyback operations, and cross-subsidies between urban and rural highways through their use of a common trust fund in the U.S. Furthermore, if passengers’ valuations of time and comfort rise as would be expected in a growing economy, integration of service may become increasingly important, required a new look at transfer points between intra- and inter-city modes. A good deal has been written about these connections individually, and the field is ripe for a text which is comprehensive enough to synthesize them, so as to give new insights into the entire transportation picture.

Stevenage Bus Experiment; Summary Report, Research Group in Traflic Studies, Univer$ity College, Gower Street, London WCIE 6BT, England, 1974.23pp., paper, n/c.

Reviewed by David Reinke, Institute of Transportation and Traffic Engineering, University of California, Berkeley, California94720, U.S.A.

This report presents a well-planned, carefully monitored land use patterns in Stevenage are not unlike those found experiment which could well serve as a model for similar in an American suburb of 50,000 to 100,000 population. bus studies in the United States or elsewhere. The The methodology employed in the study is completely purpose of the experiment was to assess the effects on different from that found in the demonstration studies patronage of several types of improvements in bus funded by the United States Urban Mass Transit service, including increases in service frequency, im- Administration. First, the study employed the expertise of provements in equipment, reduction in running time along a well-known research group, Professor Smeed’s Re- a route, improvements in service reliability, and reduction search Group in Traffic Studies. Second, the improve- of fares. These experiments were conducted on a bus line ments were scheduled in stages over a &month period in connecting a residential neighborhood with a central order to examine the effects of each change in service. business district and an employment center in Stevenage, Third, community participation in the experiment was a new town near London. Stevenage resembles a actively solicited, and an extensive publicity campaign medium-size American suburb in several ways which was carried out to inform the public of the service make this study particularly relevant to transport planners changes. In contrast, the demonstration programs in the in the United States. Car ownership levels are similar to United States have generally tended to emphasize only a those in American cities, and although there is a greater single aspect of transit improvement at a time, without concentration of residential and commercial activities, the attempting to link together successive improvements.