Faculty of Economics and Administration School of Economics Empirical Project of the course MPE_TREN: Transport Economics Student: Sebastián Chinchilla Chacón Professor: Ing. Zdeněk Tomeš Topic: Analysis of the demand for railway transport in Costa Rica. The elasticity of the demand for the route San José – Heredia – San José Autumn Semester 2016-2017 Costa Rican Institute of Railways - INCOFER Statement of the Problem: Nowadays, Costa Rican Great Metropolitan Area is facing serious problems in terms of transport, the country is small and distances also, but the times for moving from one place to another are increasing constantly. Traffic jams are an everyday issue, this due to some factors like the inefficient infrastructure of the country in terms of highways and roads, the big amount of cars in circulation and the disrespect that drivers take of the road safety rules. During this chaos, the train has always been a good mean of transportation, especially during the peak hours, however, the rail infrastructure is lagging behind the advances discovered, this mainly because the Costa Rican Institute of Railways was closed during 12 years, so this caused that there was no research, investment or any new improvements in the railway system of the country. Recently, the Costa Rican parliament approved a law for the strengthening of the Costa Rican Institute of Railways, and also the number of trains per day increased, however, the whole problem is not fixed, there’s still a lot of traffic jams during the peak hours, for driving small distances, and there are some initiatives and political promises for constructing a tram or a metro for moving into the capital, San Jose, however, this projects are just promises now, and won’t be achieved in the short run. The interesting here is that, still, the Costa Rican Institute of Railways needs some additional funding and the tariffs paid for the trains are not so expensive, it would be useful to know the elasticity of the passengers that use the train according to price. Background The Republic of Costa Rica is a Central American country that has a boarder with Nicaragua in the north and Panama on the southeast, it has access to both the Pacific Ocean and the Caribbean Sea, it has a presidential and constitutional government. The Gini coefficient per person for 2016 was 0,52, the life expectancy is around 80 years, the unemployment rate for 2016 is 9,70% and the GDP per capita for 2015 was around $10.877,2. Figure N°1. Map of Costa Rica Source: Google Images To understand the background that surrounds the problem, it is important to know a bit about the history of the Costa Rican Institute of Railways, “was created in 1985 by the Law N°7001, it is a public law institution with administrative autonomy, legal personality and own equity. The law unites the two railways of Atlantic and Pacific and all the branches that have been part of the national railway heritage since 1871. Between 1990 and 1995 the railway activity was plunged into an economic crisis, due to high debts that could not be covered, the government decided to make a technical closure, so the railway services were suspended in the whole national territory on June 28^th , 1995.” (INCOFER, 2016) The railway activity in Costa Rica was reactivated on September 1998, due to a presidential decree where it was established that it should work for transport of people and things, starting on the Atlantic region, and then, on other regions where it was considered appropriate. INCOFER is giving public transport services for the population and additionally is giving freight transport by optimizing transport times and decreasing costs, this is the main activity of the Institution and the one that generates revenues for its operation. INCOFER has actually 7 routes in use, detailed as follow: * San José – Heredia – San José * III Metropolis – Curridabat – Pavas * San José – San Antonio de Belén – San José * Transport of Bananas in La Estrella Valley, Bananito, Estrada and Matina * Transport of steel from Moín to Leesvile on Guácimo * Turistic transport to Limón and Siquirres * Turistic transport to Caldera The selected route is the one that goes from San José to Heredia and vice versa, this is mainly because these two cities of Costa Rica are very important for the economy of the country, they also possess a big amount of citizens that are flowing among this cities everyday due to reasons of labor or study, the two main and biggest universities of the country are in this cities, also free trade zones, banks and many important institutions that cause big movements of inhabitants from one city to another, in San José lives 1.607.170 inhabitants whereas in Heredia lives 497.805 inhabitants. Also this route was chosen because it helps to reduce the traffic jams in one of the most congested routes of the country, it results interesting that during the peak hours, by bus or by train, it takes more than an hour for people to move between these cities even though when the distance is approximately 13km. Figure N°2. Route from San José to Heredia Source: Google maps Review of Literature In terms of economic theory, the main concept here is the elasticity of the demand, this is defined by Cowie (2010) as “a formal measure of the rate of change of the quantity demanded in comparison to the rate of change of the price. (…) is a formal mechanism in economics by which price sensitivity is assessed and analyzed. This is measured on a quantitative basis, i.e. a number is derived in order to assess the level of price elasticity”. The same author states that there are three basic determinants of price elasticity of demand for transport services: 1. The number and closeness of alternative models of travel (substitutes) According to the theory established, “the higher the number of alternative modes available and the closer they are in meeting the same basic travel need, the higher will be the price elasticity for a particular transport service” (Cowie, 2010). In this determinant of the demand applied to the Costa Rican case, turns out to be interesting, because, for the train from San José to Heredia, there’s only one company of trains in the market, so there’s no railway competition, however, it is possible to find some substitutes for the basic travel need, like cars or buses. Nonetheless these means are not perfect substitutes, because there is a big difference on the timing, during the peak hours, the train takes the people from San José to Heredia in 30 minutes, whereas by car or by bus it could take more than an hour, depending on the day and the conditions of the traffic. 2. The proportion (and timing) of disposable income purchased on the mode of travel The income is usually one of the biggest determinants of the demand, the theory states that “the higher the proportion of disposable income spent on the mode of travel, then the higher the price elasticity of demand, (…) within transport services, the proportion of income spent in most (but not all) instances will be relatively small, although these will add up to significant amounts” (Cowie, 2010). In terms of income, the disposable amount of income dedicated to the transport does not makes a big difference, this mainly because the users of the San José-Heredia route of train, face similar prices on other means of transportation for this city, for example, on the bus lines that go from San José to Heredia, there are some that are a bit cheaper than the train, but also others that are more expensive, also because the main users of the train are people who is forced to make this route for studying or working, hence, the big determinant here is the time, which we will see as follow. 3. The time dimension The last main determinant of the demand of transport, the literature says that “is an important dimension in determining price elasticity of demand as elasticity can vary between the short and long run. Over a longer period of time, habits can change, thus there will almost always be a difference between long and short run elasticities, with the former almost certainly more elastic (…) An essential journey, such as where commuters have to travel into the center of a city each day for work or business purposes, will have relatively inelastic demand, as there is a little choice but to make the journey at that point time.” (Cowie, 2010). As it is stated by the author, there are some journeys named as essentials, they are reducing the elasticity in the demand, and this is the case of the train route from San José to Heredia, which main users are the workers and the students, they need to make this trip many times per week, so the transport is seen as a necessary service. There is a famous phrase that says that time is money, and taking this into consideration, the train can be seen as a valuable source of money, keeping in mind that the train takes only 30 minutes for going from San Jose to Heredia and the bus or the cars take around 1 hour, this added value that the train has, could be even used as a source for charging more money on the train tariff. Data and the estimation of the model The estimation of the Price Elasticity Demand is considered as the change from the first trimester in 2012 until the last of 2013, a 2-year change elasticity is what is about to be examined, the calculation will be done through the following formula: By watching the previous equation, it is possible to observe that the coefficient of the PED is 0,037 which according to the economic theory, since this number is within the range of 0