FEEDBACK TUTORIAL LETTER 1ST SEMESTER 2017 …

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FEEDBACK TUTORIAL LETTER

1ST SEMESTER 2017

ASSIGNMENT 2

TRANSPORT ECONOMICS

TEC711S

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COURSE: TRANSPORT ECONOMICS

COURSE CODE: TEC711S

MARKER TUTOR: MR. I NASHIVELA

ASSIGNMENT TWO: FEEDBACK

1. Mr. Tom the Operator of the local bus company has just received the news that

the price of fuel will increase with large margin by the end of the first quarter of

the year. He is concerned that the increase will have an effect on the number of

customers who will be using the bus. Advise Mr. Tom. [15 Marks]

ANSWER

The advice will be based on cross elasticity of demand. We know that Petrol and

a bus are complementary goods.

If the price of petrol goes up it become expensive to buy petrol, the first effect is

that the demand for petrol will fall. This is represented by a shift in demand curve

to the left. Because petrol is used to run a bus as the demand for petrol fall, the

demand for bus service will also fall. This will be because if the price of petrol

increases the owner of the bus Mr. Tom has to increase the bus fare in order to

recoup cost. What will happen is that the when the demand of petrol goes down,

the supply of bus service will also goes down resulting in the shift of supply curve

to the left.

Market for bus Market for fuel (petrol)

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2. The Operation Manager of Trans Namib Ltd, want to assess the efficiency of rail

operation at a company. He approached you as a Consultant to assist him on

how to carry out this assessment. Advice the Operation Manager based on the

three type of efficiency namely technical efficiency, cost or production efficiency

and allocative efficiency. [15 Marks]

ANSWER

a Technical Efficiency measure the firm efficiency based on input output

ratio. The Operation Manager of Trans Namib he have to calculate all the

inputs in the operation of rail service such as labor, capital, technology

etc, and compare with the outputs such as goods and passengers

transported using the rail. If he uses fewer inputs and get more outputs

then we can say that the operation is efficient. If however more inputs

are used to produce less outputs, then the operation is not efficient.

b Cost or production efficiency – the operation may be technical efficient,

where we use few inputs and more outputs and we may have different

combination of inputs and outputs where we are technical efficient. The

cost efficient is the one that we produce at minimum cost.

c Allocative efficiency- allocative efficiency has to do with producing the

good in the right quantity and the one which is needed in the market. we

can be technically efficient and cost efficient, but the onus is in the fact

that we are producing what is needed.

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3. The following information describes the production schedule of a local courier

company for a period of one day. One employee short about 500 envelopes per

day and the Courier Company has five employees. Calculate the courier Total

product (TP), Average Product (AP), and Marginal Product (MP) if a company

employs 1,2,3,4 and 5 employees. [15 Marks]

ANSWER

Labour unit TP AP MP

1 500 500 500

2 1000 500 500

3 1500 500 500

4 2000 500 500

5 2500 500 500

TP = Total Product

AP = Average Product

MP = Marginal Product

4. The production Schedule is said to be S shaped in the long run, Explain why this

is so and discuss 4 sources of increasing return to scale for a transport operator.

[10 Marks]

ANSWER:

At first there are large gains when firm size increases - the relative percentage

gain in output is greater than the relative percentage increase in inputs. Note

also that this effect increases as firm size increases. These gains in total

productivity, or increasing returns to scale, continue up to a certain point. Once

firm size (as measured by the level of inputs) rises, the proportionate gains from

adding more inputs are not as large as before, hence the firm experiences

decreasing returns to scale.

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Sources of increasing return to scale are:

1. Specialisation of labour - As firm size increases, more labour can be employed

in specialised tasks and thus become more proficient at those tasks, leading to

increase in productivity.

2. Scheduling of inputs - As firm size increases, there exists greater flexibility in

how the inputs can be combined and hence better utilisation of all of the inputs

may be expected. For example, scheduling of drivers to ensure that the vehicle

stock is operated over the longest possible number of hours

3. Capital inputs - purchasing capital inputs to increase efficiency

E.g. increasing a railway line from single to double track increases capacity by a

factor of four, hence potentially significantly increasing the productivity of rail

services.

4. Indivisibilities – For example a telephone line. When setting up in business, a

company will need to install and rent a phone line. With small expansions in size,

there will probably be no need to install a second phone line, hence this ‘input’ is

spread over a larger output.

5. With the aid of the graph clearly explain how efficiency is achieved in perfect

competitive transport market. [10 Marks]

ANSWER

The graph on the right hand side in panel A depict that firms in this market are

making abnormal profit. We know that the firms produce at a point where

marginal cost (SRMC) equals marginal revenue (MR). At this point a firms are

not producing at the minimum of Short Run Average Cost (SRAC), meaning there

is a waste.

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In the long run however more firms will enter the market to tap on abnormal

profit. This effect of new firms entering the market is shown below as a result

the supply curve has shifted to the right, in the first graph in Panel B. The market

price therefore falls to PLR.

The individual firm adjusts its level of output to the new profit maximizing

position, which is now at QLR. Note that the firm is producing at the lowest point

on the long-run average cost curve; hence productive efficiency is ensured (MES)

which means it is covering all its costs including the cost of capital. The abnormal

profits that were being made in the short run have now been ‘transferred’ to the

consumer in the form of lower prices. It is for these reasons that perfect

competition is said to be the most economically efficient market structure

Panel A

Panel B

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6. If we assume that a given bus market is in perfect competition which charges a

flat fare of $2, and if the formula for the total demand (in thousands) in the

market is given by the equation:

Qd = 300 − 50P

Where Qd is the quantity demanded in thousands at a given price P.

If we further assume constant returns to scale, then:

a) What is the total market demand at the $2 flat fare? [2 Marks]

ANSWER

a) Market demand (Qd) = 300 – 50(2) = 200

b) If the market is shared equally by 4 firms, what is the number of passengers

carried by each company? [2 Marks]

ANSWER

b) If the market is shared by 4 firms, then the number of passengers carried by each

company will be 200/4 = 50

7. Explain the following concept with relation to transport economics; [6 Marks]

ANSWER

a) Predatory pricing

Predatory pricing is said to occur when a firm, normally with market power in

more than one market, reduces its price below cost in the short run so as to

obtain abnormal profit in the long run. Predatory pricing is aimed at either

achieving or maintaining a monopoly situation, with the price set so as to

bankrupt competitors, ‘encourage’ them to merge or in fact collude.

b) Price fixing

Price fixing is one such collusive activity, a situation where firms within a

market agree on the price they are going to sell their goods or services at in

order to remove price competitiveness and thus increase their profits.

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Collusion allows firms to act as a monopolist with the aim of maximising their

joint profits

c) Consumer surplus

Consumer surplus is the difference between the price of the product and the

price the consumers are willing to pay. It is the area above the price but

below the demand curve in the graph.

8. Discuss how the following means are used to address the issues of environmental

impact associated with transport. [6 Marks]

ANSWER

a) Bargaining

The basis of this particular approach is that if property rights are assigned

then bargaining will occur naturally between the various parties that suffer

from or are the source of external cost, the externality, and the optimum level

of pollution will be the result

The notion of bargaining is based on the idea that if property rights are

assigned to either of the two parties, thus giving the airline operators or

airport the right to pollute or to those who are affected by the pollution to

clean air, then via bargaining agreement will be reached so that pollution is

reduced.

b) Trade permits

The idea behind tradable permits is that polluters are presented with a

number of permits which allow them to emit a particular level of CO2. The

number of permits which exist clearly limits the amount of emissions. The

permits are tradable in that they can be bought and sold to other polluters

who are participating in the particular tradable permits scheme

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c) Setting of standards

Polices such as the requirement for an annual vehicle inspection for road

trucks and private vehicles and vehicle exhaust emissions tests or limits on

noise from aircraft

9. Explain how cost-benefit analysis is used to make transport decisions. [10 Marks]

ANSWER

Cost benefit analysis is a policy tool used to decide whether to carry out the project

or not. It looks at the costs and benefits associated with the project and weight the

benefits against costs. Usually costs and benefits are translated into monetary values

before they are compared by taking the present value of benefits and costs. If

benefits are more than cost the project is undertaken and if the costs exceed benefits

then the project is not undertaken. it is worthwhile mentioning that costs and

benefits involves externalities (positive and negative) also.

Let’s assumes that the governments want to put up a road between Windhoek and

Okahandja. They have to consult all the stakeholders and collect information on cost

and benefits that accrue to the project.

The cost may be includes the following.

a) Monetary costs, such as Cost of Materials, Labour, Machinery, environment

impact assessment etc.

b) None monetary cost, such as damage to environment, noise pollution, Air

pollution, health related problems due to emission etc.

The Benefits may include things as;

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Reaching destination in time, easier of movements, economic development

that is taking place because of improved transport system, access to raw

materials and to the market etc.

If the Present monetary value of the benefits exceeds cost then the project is

undertaken.

Students may use numbers and discounting technique in their example to

illustrate the concept.

10. Briefly explain the main reason why government regulate the transport industry.

[5 Marks]

ANSWER

To overcome the market failure of imperfect/dissymmetry of information -

These are imposed in order to regulate user behaviour and to impose

minimum standards on the operation of the transport system

The market can no longer regulate itself - If the market can no longer

regulate itself, then external regulation is required to ensure that economic

efficiency is achieved.

Why this occurs is because most transport industries tend towards anti-

competitive market structures, namely monopoly and oligopoly. hence

regulation is required to attempt to minimise the disadvantages associated

with such market structures.

To correct for externalities - due to the high level of externalities present in

transport markets, hence all decisions are based on private costs and benefits

and do not take into consideration the wider implications of these decisions

To ensure the quality of the service provided – agreements between the

local authority and the bus operators, where the local authority can limit

entry to the market to only those bus companies that meet the vehicle

standards specified in the agreement.

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Regulation may also be used to ensure the quality of service in the longer

term. For example market entry may be restricted in order to provide market

protection and hence maintain the profitability of those already in the

market.

To overcome the market failure of imperfect/dissymmetry of information -

These are imposed in order to regulate user behaviour and to impose

minimum standards on the operation of the transport system

The market can no longer regulate itself - If the market can no longer

regulate itself, then external regulation is required to ensure that economic

efficiency is achieved.

To correct for externalities - due to the high level of externalities present in

transport markets, hence all decisions are based on private costs and benefits

and do not take into consideration the wider implications of these decisions

To ensure the quality of the service provided – agreements between the local

authority and the bus operators, where the local authority can limit entry to

the market to only those bus companies that meet the vehicle standards

specified in the agreement.

Regulation may also be used to ensure the quality of service in the longer

term. For example market entry may be restricted in order to provide market

protection and hence maintain the profitability of those already in the

market.

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I wish you the best of luck for exam!!!!!!!!!!!!!