1. Outline the characteristics of the main modes of transport

Modes of transport are the means of transport, basically road, rail, air, water and pipes. Road has advantages in terms of flexibility, and connectivity, suitable to transport almost all goods. Rail is best suited for movement of bulk of goods, however problems of interchange can reduce the its efficiency. Air has advantage of moving passengers over long distances and in a relatively high speed. Pipes are good in transporting liquids, and gasses, however they tend to promote monopolies.

2. Explain why transport is derived demand

Derived demand is one that caused by demand for some other good and service. As most of the people do not travel just to travel, most of them do it for a certain purpose, therefore the demand for travel is derived.

3. Explain how to measure transport demand

The demand for the transport is determined by many factors, the most important ones are national income, the need to communicate to work and the costs of transport. If those factors are measured, there can be eablished the demand for transport

4. Explain how transport forecasts are made and why?

Various assumptions are made by when forecasting the demand for transport; the GDP growth, the fuel prices, the population growth, car ownership and industrial output and the demand and supply of import goods. The forecasts are done to estimate the need for the future transport network, to estimate where the greatest bottlenecks are going to occur, and to be able to estimate the likely effect of certain transport policies.

5. Explain some of the of the main ways in which transport sector can be described through data

The most important ways of measuring the transport is by assessing the amount of passengers and kilometres they travelled and by assessing the tonnage of freight and kilometres it travelled.

6. Outline economies of scale and their application to transport

There are two types of economies of scale – internal and external. The former are:
The technical economies of scale – when with the increase in output the unit costs fall. It can be applied to transport when a company can increase the size of vehicles, therefore transport in a cheaper manner.
Purchasing economies. when a company is able to buy cheaper, because it is buying a greater bulk of goods. Example in transport is ability to buy cheaper fuel
Managerial economies. When in a large firm more labour can specialise, hence work more efficiently.
Financial economies. When a company can buy more due to the increase in its capacity.
External economies of scale occur when the increase in the size of an industry is leading to fall in long run average costs of an industry.
transport example are airports, where many different businesses are clustering together (ie shops, catering services etc.)

7. Describe contestability in transport markets

Contestability is the extent to which barriers to entry and exit the market are free and costless. Road transport is relatively contestable due to the relatively small entry costs, while the aviation industry is not contestable.

8. Describe barriers to entry and their application to transport

Barriers to entry are all the costs that have to be undertaken by every new entrant to a particular market. The barriers to entry are relevant to the aviation market, where they are relatively high, therefore not many new entrants can enter the market. This reduces the contestability and allows oligopolies to emerge.

9. describe the barriers to entry and their application in to the transport market

A barrier to entry is any obstacle that deters new firms from entering the market. This include:
High set up costs – ie the capital required to set up small haulage company is relatively low, while opening new fly operator is much more expensive
Economies of scale – when the established firms are limit pricing, therefore not allowing new entrants to the market, ie the main freight transporters ie the DHL.
Brand loyalty
Intimidation

10. describe the deregulation in the transport market

The deregulation is process in which the government is removing legal restrictions that act as a barrier to competition in a market. In Britain in the early 1980, duting the “thatcher era’ most of the transport was deregulated. The bus industry was deregulated in 1985and 1985, when almost all legal barriers to entry were removed, in order to increase the competitiveness on the market. Within the EU there has been a single open competitive aviation for the carriers of the member states. Those reforms made the market much more contestable.

11. Explain and describe privatisation in the transport market

Privatisation is the process during which goods owned by the public sector are sold off to the private sector. In 1980s during Thatcher’s premiership many of transport industries were privatised. The bus industry was to a large extent privatised in the 1980s, the as all state companies were changed into for profit companies or privatised. In 1993 the rail companies were privatised, there was a separation of the infrastructure from the operation.

12. Explain the negative externalities due to ever increasing transport demand

The most important negative externality is the increase in the amount of CO2 in the atmosphere, as most of transport vehicles are oil powered. Others are: noise, congestion and destruction of landscape.

13. Describe how transport interacts with the environment

As most of transport vehicles are oil powered, the increase in transport is resulting in destruction of the natural environment. For instance, in the UK transport was responsible for 23% of overall pollution.

14. Describe and evaluate sustainability issues in transport

Sustainability in transport is ability to continue to operate in the long run. One of the biggest problems of transports is the fact that the most important branches are unsustainable. It stems from the fact that most of them use oil as fuel, and scarcity of the resource and fact that it is not renewable makes most of the modes of transport unsustainable.

15. Explain why traffic congestion is a cause of a market failure.

It is a market failure, because it increases the amount of pollution, increases the time that people to commute to work and decreases their standards of living by increasing noise. This is a market failure, because the market failes to provide necessary resources to decrease the average amount of cars in the

16. Describe the costs of congestion.

The traffic congestion imposes a variety of costs on the society. Firstly it increases the time and the costs of commuting in the city. This increases the price of the labour force and can affect the price of products that have to be transported to the city.

Moreover, congestion increases the amount of CO2 emitted into the atmosphere, as the fuel efficiency decreases during congestion.

17. Explain how to deal with congestion

Some of governments, ie the UK one are dealing with congestion by imposing congestion charge, which artificially increases the price of car usage in the urban areas. In London it is charge of five pounds per day. Other ways of reducing the congestion is the road pricing.

Other policy of the UK government to reduce the pollution is by using regulations. The introduction of the Low Emission Zone

Different ways of dealing with congestion is by increasing the amount of roads and public transport in the city. Building more roads relief the existing infrastructure, however is perceived by most of the economists as a short sighted solution. It is argued that leads to an increase in the amount of cars on roads.

The latter policy is to provide an alternative to cars, which is another relief for the existing infrastructure.

18. Describe road pricing schemes

Road pricing are all charges that are imposed on the users of roads by the government. The road charges includes fuel taxes, licence fees, parking taxes, tolls, and congestion charges. In the UK the road pricing consists of congestion charges, vehicle excise duty and fuel taxes.

19. Outline how other countries tackle congestion

Other countries tackle the congestion problem in a variety of other ways. Singapore, for instance is using an electronic road pricing, by putting electronic chips into car that monitor the amount of CO2 produced by the car.

20. Describe the role of the public and private sectors in transport

The most important role of the public sector is to provide the infrastructure. Although the private sector is often involved in the provision of the funds for the infrastructure, in PFI – Private Finance Initiative – the private sector is participating in funding the projects.

21. Explain what is meant by the cost benefit analysis, when it is used and its limitations (transport)

The cost benefit analysis is the balance of the of the social costs and benefits. By comparing those the CBA is assessing whether the project is cost-effective from the point of view of the society.

In transport the CBA is most

22. Explain how the government approaches new road schemes

The government is now using the COBA model, which counts which project will reduce most of the costs. It splits then into three components – time saving, costs of accident saving and vehicle operating savings. It compares it with the expenditure which is the sum of the construction and maintenance costs.

23. Describe the integrated transport policy

The integrated transport policy is one which objective is to integrate all modes of transport, water, air, rail and road transport. It allows the people and freight to switch easily between different modes of transport. It seeks to shift the transport to more sustainable fuels.


24. Describe the main features of the current transport policy

It tries to combine the economic growth with the reduction of emission of CO2 to the atmosphere. Is supposed to ensure sustained investment is the way there will be enough resources to stably increase the capacity of the infrastructure.

25. Outline sustainable transport policy

Sustainable transport is one that will be able to be run in the long run.

1. Outline the characteristics of the main modes of transport

Modes of transport are the means of transport, basically road, rail, air, water and pipes. Road has advantages in terms of flexibility, and connectivity, suitable to transport almost all goods. Rail is best suited for movement of bulk of goods, however problems of interchange can reduce the its efficiency. Air has advantage of moving passengers over long distances and in a relatively high speed. Pipes are good in transporting liquids, and gasses, however they tend to promote monopolies.

2. Explain why transport is derived demand

Derived demand is one that caused by demand for some other good and service. As most of the people do not travel just to travel, most of them do it for a certain purpose, therefore the demand for travel is derived.

3. Explain how to measure transport demand

The demand for the transport is determined by many factors, the most important ones are national income, the need to communicate to work and the costs of transport. If those factors are measured, there can be eablished the demand for transport

4. Explain how transport forecasts are made and why?

Various assumptions are made by when forecasting the demand for transport; the GDP growth, the fuel prices, the population growth, car ownership and industrial output and the demand and supply of import goods. The forecasts are done to estimate the need for the future transport network, to estimate where the greatest bottlenecks are going to occur, and to be able to estimate the likely effect of certain transport policies.

5. Explain some of the of the main ways in which transport sector can be described through data

The most important ways of measuring the transport is by assessing the amount of passengers and kilometres they travelled and by assessing the tonnage of freight and kilometres it travelled.

6. Outline economies of scale and their application to transport

There are two types of economies of scale – internal and external. The former are:
The technical economies of scale – when with the increase in output the unit costs fall. It can be applied to transport when a company can increase the size of vehicles, therefore transport in a cheaper manner.
Purchasing economies. when a company is able to buy cheaper, because it is buying a greater bulk of goods. Example in transport is ability to buy cheaper fuel
Managerial economies. When in a large firm more labour can specialise, hence work more efficiently.
Financial economies. When a company can buy more due to the increase in its capacity.
External economies of scale occur when the increase in the size of an industry is leading to fall in long run average costs of an industry.
transport example are airports, where many different businesses are clustering together (ie shops, catering services etc.)

7. Describe contestability in transport markets

Contestability is the extent to which barriers to entry and exit the market are free and costless. Road transport is relatively contestable due to the relatively small entry costs, while the aviation industry is not contestable.

8. Describe barriers to entry and their application to transport

Barriers to entry are all the costs that have to be undertaken by every new entrant to a particular market. The barriers to entry are relevant to the aviation market, where they are relatively high, therefore not many new entrants can enter the market. This reduces the contestability and allows oligopolies to emerge.

9. describe the barriers to entry and their application in to the transport market

A barrier to entry is any obstacle that deters new firms from entering the market. This include:
High set up costs – ie the capital required to set up small haulage company is relatively low, while opening new fly operator is much more expensive
Economies of scale – when the established firms are limit pricing, therefore not allowing new entrants to the market, ie the main freight transporters ie the DHL.
Brand loyalty
Intimidation

5) Is EU intervention to reduce C02 emissions through the Emissions trading scheme always for the best? Discuss [20] (Extract 5)

The EU trading scheme is a policy that aims to reduce the negative externality arising from the increase in the CO2, by reducing its amount in the atmosphere. It tries to achieve by imposing tradable permits which most of the CO2 emitting industries have to pay for every tonne of CO2 that they emit to the atmosphere. The essay will assess the pros an cons of reducing this type of externality.

The pro of this policy is the fact that it introduces the market mechanism, hence the prices of the pollution permits are regulated by the demand and supply forces. Therefore the government does not has to assess the price of the pollution permits.

This market based mechanism allows to give greater incentive to the emitters of the CO2 to reduce the negative externality. Those who produce more than their amount of pollution permit allows them, have to buy more. Those who go below the amount of CO2 they were given, can sell their pollution permits.

Moreover, the system is efficient as its relatively economic, as it does not requires controlling the exact amount of emitted CO2. Moreover, those who support the ETS, argue that it is more politically feasible, as it is less controversial than tax, to which the public opinion tends to be hostile.

Those who support the ETS, argue that the system is reducing the dead weight loss to minimum, contrary to taxation, which seems now to be the only alternative to the pollution permits system.

A speculative argument could point that the system fails to increase the governmental revenue, which is particularly important in the times of massive bail outs is increasingly important.

Additionally, the ETS allows to allow a very specific amount of the CO2 being emitted in a period of time, as the government is setting the amount of CO2 that is going to be emitted, by allowing a concrete amount of pollution on the market. The price of the pollution permit will adjust, by the demand and supply forces.

However, the opponents, for instance Geoffrey Sachs argue that the pollution permits scheme has more drawbacks than plusses.

It can be inefficient, when there is for instance large reduction in demand, as occurred in 2008 (ie German national output fell by 20%). This leads to a great reduction in prices of the pollution permits, which therefore means that the negative externality is not going to be reduced sufficiently.

Moreover, the fact that the system is flexible, may make it more responsive to the political pressure, which is most likely to reduce its effectiveness, as the public opinion tends to be reluctant to any system that increases the prices.

Other argument against the system is one that points out the likeability of the situation in which the developing countries will receive more pollution permits, as they will have less chances to reduce the emission of CO2 as fast as developed nations. This would most likely lead to a situation in which industries in developing natinons would buy those permits from the developing countries, which additionally reduce the political feasibility.

Using extract 1 compare the world wholesale price of butter in 2006 and 2007 in the world and in the EU. [3]

As demonstrated in extract 1. both the EU and the world wholesale price of butter remained stable in 2006, the former did not rise above 2.6 Euro per kilogram and former did not rise above $2,500 per tonne.

However in 2007 the EU and wholesale price of butter started to increase in February. The world wholesale price of butter started to increase in January. The increase in the world wholesale of butter was much more stable, while the prices of the EU would rise slowly from February to end of May, form 2.4 Euro per tonne to 2.8 Euro per tonne.

Using figure 1.2, in extract 1, compare the EU wholesale price of butter in 2006 and 2007.

In 2006 the EU wholesale price of butter did not change, significantly. It s lowest point was in August when it was only 2.4 Euro per kg. The price did not came out of the boundry of 2.4 to 2.6 Euro per kilogram.
In 2007 the fluctuations were much bigger, in February the price per kg. fell at its lowest point, then it started to increase. In from March till May it increased in a moderate pace – from to 2.5 to 2.8 Euro per kilogram. It then started to rise much more sharply and almost reached 4.2 Euro per kg in October. It then fell quickly, to bit above 3.4 Euro in December.

Using fig. 1.3 and fig. 1.4 compare the average price of fertiliser and average price of feed wheat in the UK between October and 2006 and October 2007.

The price of feed wheat in the UK from October to January remained stable, fell in February and started to increase in March. In July there was rapid increase in the pace of growth of price, and the price increase by about 70 Pounds per tonne from April till October 2007

The average price of fertilisers in the UK was stable from October 2006 to March 2007. In March and April there was a sharp increase in the price of fertilisers, by almost 10 pounds per tonne. Then there the price of fertilisers remained stable on the level of 155 Pounds per tonne since April up till Agust 2007. In August there was a sharp increase in the price of wheat and which in October reached level of Ł175 per tonne.

Using Fig. 1.2 and Fig. 1.3 compare the EU wholesale price of butter in 2007 with the average price of feed wheat in the UK in 2007.

As demonstrated in the diagram, in the world wholesale prices of butter were rising in a relatively stable pace, from January to December, rose from 2,500 US$ per tonne to 4,500 per tonne. There was no sharp increase in this pace of growth.

The EU wholesale price of butter increased in a relatively small pace since January till May, and then the pace picked from May till September, in those 5 wholesale price of butter increased from 2.7 Euros per kilogram to 4.1 Euros per kilogram. It than started to fall.

1. Are there any negative externalities associated with biofuel production?

Yes, because of nitrogen fertilisers there is more greenhouse gases, according to Crutzen. Unanticipated negative externality of the biofuel production is increasing the price of food, by diverting the wheat and corn production from production of food. The negative externality resulting from it is the

Moreover, another negative externality of producing biofuel, is the fact that given the tax relief for the farmers producing it, and the tax relief when selling it there might occur a situation in which more fuel is used than is produced, which is an obvious misallocation of resources.

Moreover, According to Grunwald's Time magazine cover story, biofuels are contributing to the deforestation of the Amazon rainforest. The chain of unintended consequences is as follows: 1) subsidies for biofuels lead some U.S. soybean farmers to switch to corn; 2) fewer soybeans lead to higher soybean prices; 3) higher soybean prices lead Brazilian soybean farmers to expand, displacing cattle ranchers; and 4) cattle ranchers clear new pastures out of the Amazon.

2. Are there any positive externalities associated with biofuel production?

There are according to European politicians. The main positive externality is the fact that during production of the biofuel, during the vegetation process of plant from which biofuel is going to be produced leads to decrease in the amount of CO2 in the atmosphere.

3. Can increased transport in the UK be met by usage of ‘green’ fuels?

Yes, to some extent. Production of the biofuel from the sugar beet uses less fuel than it produces, therefore it could meet the increasing demand for fuel.

4. Has the market intervention in the market for biofuels led to more problems than it solved?

Most likely it led to more problems that it solved. It was most likely for one of the reasons for the increase in the food prices. This on its own was a huge, global problem, resulting in riots, hunger, and in many examples death from starvation.

As mentioned, it also resulted in increasing deforestation, which most likely outweighs the positive externality which was supposed to be the increase CO2 consuming plants.

The fact that the governments are subsidising the inefficient wheat and maize, instead of subsidising efficient in producing biofuel sugar beet is another example of government failure.

5. Explain the difference between carbon tax and carbon trading scheme.

Carbon trading scheme is a system in which polluter to be allowed to pollute – emit CO2 to the atmosphere has to buy a pollution permit that is going to cover the expenses imposed on the third party. If a producer reduces emission of CO2 under a certain level, he is allowed to sell the pollution permits that he did not use.

Carbon tax is a direct tax imposed on the producer. The amount of tax paid by the polluter depends on the amount of CO2 he produces.

6. Is the European carbon emission trading scheme an effective way of correcting for environmental market failure?

It is, as long as pollution permits are expensive enough. Because of the recession, there great reduction in manufacturing. This leads to situation in which the pollution permits are so cheap, that there is no incentive to reduce the negative externality.

7. What is the link between biofuel production and global food price inflation?

The link is that there is a joint supply of biofuel and food. For production of both the same resources are used. Therefore, if the demand for one of the products is rising, the price of other is also rising. As there was an increase in the demand for biofuel, the price of food increased, because of the reduced supply of food.

8. Identify from the various extracts in the stimulus materials possible examples of government failure

Examples of government failures from the extracts:

1. the failure of the Russian government to increase production of food
2. Other example of government failure was subsidising biofuel

Day seven: Environmental economic policies

1. Has the policy adapted by the UK and US with regards to biofuels contributed to price inflation?

France, Germany, The United Kingdom and The United States governments have supported biofuels with tax breaks, mandated use, and subsidies. These policies have the unintended consequence of diverting resources from food production and leading to surging food prices and the potential destruction of natural habitats. A World Bank policy research working paper concluded that biofuels have raised food prices between 70 to 75 percent.

2. The US imposes tariffs on sugar cane from Brazil which is the most energy efficient form of biofuel and subsidies corn production which is inefficient – is this an example of government failure?

Report of OECD is also critical of limited reduction of GHG emissions achieved from biofuels based on feedstock used in Europe and North America. It is stating that the current bio-fuel support policies would reduce greenhouse gas emissions from transport fuel by no more than 0.8 percent by 2015, while Brazilian ethanol from sugar cane reduces greenhouse gas emissions by at least 80 percent compared to fossil fuels.

It is therefore huge misallocation of resources, not to use the more efficient Brazilian ethanol. Hence a government failure.

3. What are the major environmental policy objectives of the EU?

sustainable development
Promote renewable energy
Market incentives should have a role to play
The precautionary principle should apply:
Fiscal harmonization to achieve environmental goals
Reduction of the CO2 in the atmosphere
making the polluter pay

4. What factors explain the 50% growth in fuel consumption by cars and trucks in the EU in between 1985 and 2004?

Because of the growth in consumption in China and India, because of the fall of the USSR – that also increased the demand. Moreover there was an overall increase in the road infrastructure, especially in so called ‘new Europe’ and developing countries such as India and China.

5. What is the Kyoto Protocol and how likely is that the EU will reach its 2012 emission target?

The Kyoto Protocol establishes legally binding commitments for the reduction of four greenhouse gases. The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC or FCCC), an international environmental treaty produced at the United Nations Conference on treaty is intended to achieve "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system."

According to the protocol of the United Nations Framework Convention on Climate Change, countries should reduce their emission of greenhouse gases to 5% below the 1990 level by 2008-2012. The EU and its Member States have committed themselves to an 8% reduction.

It was unlikely that the EU is going to manage to reach the target. However, after the credit crunch and the recession, as the output fell in most of the countries, it is much more likely to happen. On the other hand the transport, especially cars and trucks are producing more CO2 than it was planned.

6. What is the CAP policy with regards to set aside land and biofuel production?

In 1990 the set aside plan was introduced. It was commitment of the agricultural workers to set aside 10% of their land, to reduce the overproduction. As the biofuels were introduced, farmers were encouraged to start to use their land which was earlier set aside.

7. What are ‘energy crops’ and what policies have the EU put in place to encourage production of these products?

Fuel for agricultural use often does not have fuel taxes (farmers get duty-free petrol or diesel fuel). Biofuels may have subsidies and low/no retail fuel taxes. Biofuels compete with retail gasoline and diesel prices which have substantial taxes included.

8. What is the EU emissions trading scheme (ETS)? What is the ‘second stage’ of the ETS that is running from 2008 to 2012?

ETS is the largest in the world emission trading scheme. Under the EU ETS, large emitters of carbon dioxide within the EU must monitor and annually report their CO2 emissions, and they are obliged every year to return an amount of emission allowances to the government that is equivalent to their CO2 emissions in that year.

It operates in system of marketable pollution permits. The producers, whose industry is emitting CO2 or other environmentally dangerous gas is obliged to pay a pollution permit. It has to buy proportional amount of those emission allowences in order to legally produce. Emission allowances for any plant operator subject to the EU ETS are given out for a sequence of several years at once. Each such sequence of years is called a Trading Period.

The second phase is planned change in the policy, which is going to expand the scope of the plan significantly. It will be introduced between 2008 ad 2012. The pollution permit program will include aviation industry which is the most polluting industry, and the most quickly growing industry. The inclusion of aviation is estimated to lead to an increase in demand of allowances about 10-12 million tonnes of CO2 per year in phase two.

Three non-EU countries are going to be included, Lichtenstein, Norway and Iceland.

CDM (Clean Development Mechanism) and JI credits are expected to be introduced in second phase through the EU's 'Linking Directive', although it has been agreed that schemes can be started in advance during Phase.

9. Using a supply and demand diagram illustrate how the price of carbon permits is determined and how it might change over time?

The market forces determine the price of carbon permits. Given that there is a limited supply of the pollution permits, and the European commission is not likely to increase their amount and the demand is going to rise, the diagram representing the price of carbon permitis is going to look like that:



10. How will a reduction in the number of tradable permits under the ETS ‘stimulate the investment into low carbon energy’?

It will provide an incentive to reduce the amount of emitted CO2 for two reasons.

It will firstly force to reduce the emission so the producer wont have to buy pollution permits. If he reduces emission enough, he will be able to sell remaining pollution permits, which another incentive to reduce the amount of emitted CO2.

Jan Beaupre