Transport Cost Characteristics and Rate Fixation
The study of the economic aspects of transport or in other words transport economics is of prime importance both to economists as well as to geographers. Until recently, geographers have tended to ignore the fundamental importance of cost and price as influences, but now they intend to study the economic aspects realising that an efficient transportation system in many ways is the lifeblood of the economic system. Therefore, the study of the nature of transport costs and pricing, at least in so far as they affect the spatial patterns of transport phenomena, is a basis to transport geography.
The Structure of Transport Costs:
In dealing with transport costs, the distinction between private costs and social costs is important. The former, as the name suggests, are costs incurred by the individual or transport operator in providing a particular services. As Lipsey (1971) says, “this is the opportunity cost to the firm (or individual) or the resources used… these are usually based on the market value of factors purchased”.
The identification of these costs is not easy. G william and Mackie (1975) have stated that “the non-storable nature of the product and the differences in the needs for and methods of providing and financing track and terminal facilities between modes, make the transport sector as a complex one even in this respect”. On the other hand, social costs are different.
Lipsey defines them as “the opportunity cost to the whole of society of the resources that the firm (or individual) uses”. They are costs imposed on society as a whole through an individual making a trip or a transport operator providing a service. These costs are not paid for by the user – social costs are incurred as a result of external effects of the transport activity.
The two broad category of transport costs are fixed costs (usually called by economists as inescapable costs) and of variable costs (escapable costs).
- Fixed Costs
These are costs, which are incurred before any traffic at all passes.
They include the costs:
(i) Of providing the infrastructure (i.e., the roads, the port or the railway line);
(ii) Of providing, equipping and staffing the terminal facilities (i.e., bus depots, railway stations or airports);
(iii) Of providing managerial, administrative and maintenance staff and their offices and workshops.
These costs are inescapable because they cannot be avoided except by abandoning the whole operation. They also do not vary with the level of traffic, but remain independent of it. A railway signal-box of the old fashioned kind, controlling a short stretch of line, must be manned (and thus incurs wage costs) whether there is one train or six trains per hour over the line.
- Variable Costs
These are costs incurred by the actual movement of traffic and therefore vary with the level of the traffic passing. They include the cost of fuel, crew wages and the maintenance of vehicles due to the operation of those vehicles in traffic service, for example the replacement of worn bus tyres or routine inspection of an aircraft after so many hours airborne. They are called escapable because they can be avoided or escaped by not running a particular train, suspending a particular flight or a private motorist leaving his or her car in the garage and walking to the shops.
But there is one very important consideration, which complicates an otherwise simple concept. In the very short run, to suspend the last bus on Saturday night will probably see only the fuel and tyre wear, for even the driver will have to be paid the guaranteed minimum weekly wages. Over a slightly longer period, all the drivers’ duties could be rearranged and perhaps one of them gives notice.
In the medium run of several years, bus schedules could be redrawn and four new buses ordered as replacements instead of five. In the long run the whole bus service could be closed down and then all the costs previously regarded as fixed would become escapable. We must therefore talk in terms of short-, medium- or long-term escapable costs and must remember that a short-term inescapable cost may become escapable in the medium term.
Because of differences in the basic technology of the various transport modes, the proportion of fixed (inescapable) and variable (escapable) costs in the total costs varies as between those modes. For example, the railway is characterised by having a high proportion of fixed costs in its total costs.
A freight rate (historically and in ship chartering simply freight) is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport (truck, ship, train, aircraft), the weight of the cargo, and the distance to the delivery destination. Many shipping services, especially air carriers, use dimensional weight for calculating the price, which takes into account both weight and volume of the cargo.
The cost which a shipper (the consumer or business providing goods for shipment) or consignee (the person or company to whom commodities are shipped) is charged for the transportation of goods is determined by a number of factors. The main factors in determining the freight rate are: mode of transportation, weight, size, distance, points of pickup and delivery, and the actual goods being shipped. All of these factors play their own independent role in determining the price or rate at which the freight will be transported but they are also all interconnected. When determining which mode of transportation will be used to deliver the freight to its destination there are many things which need to be taken into consideration which will all have an effect on the freight rate. Federal, State, and Local authorities all have their own laws and regulations with regards to the size, weight, and type of freight which can be transported on their roads. Transportation of freight by Rail, Water, or air craft all have their own regulations which take into account Federal, State, and Local regulations as well as safety concerns which contribute to the rate at which freight is transported. In general, the more freight you transport, the cheaper it is. This is an important factor in the rate charged to people or companies shipping freight. There are many businesses out there whose sole purpose is to make the transportation of freight cheaper and easier for small businesses and individuals who need to move freight.