2. TRANSPORT DEMAND ELASTICITY ELASTICITY •Elasticity of demand is the responsiveness of demand to a change in one of its determinants •Price, cross-price, income, ….. •Important for evaluation, business and transport policy Policy •Especially price elasticity has a huge impact on transport policy and decision making •Given that many transport markets are regulated → setting the right fare is essential to achieving policy objectives •Price elasticity is crucial in calculating revenues from the imposition of a tax or in the level of subsidy needed to reduce price PRICE ELASTICITY = Price elasticity of demand = the consumer's demand responsiveness to changes in prices Demand curves Elastic Inelastic Unitary Determinants of price elasticity •The number and closeness of alternative modes of travel (substitutes) → the higher the number of alternative modes and the closer they are in meeting the need → the higher price elasticity •Proportion of disposable income spent on the mode of travel → if it is small, the price elasticity will be also small •Time dimension → time may bring about a change in behaviour → over time habits may change Time dimension Interpretation •Over time elasticity values for transport have been increasing → consumers of transport services have been becoming more price sensitive over time •Pauley et al. (2006): bus fare elasticities: -0.4 in the short run; -0.55 in the medium run and -1.00 in the long run •Beware of high variability of results among studies → each finding applies to a particular situation Variability Interpretation •Single fares unitary elastic, the 10 ticket metro ticket highly elastic; 10 ticket bus fare relatively inelastic •Junior travel card +0.56! → Giffen good →raise in price probably raised awareness of it •High degree of variability in elasticity values → due to travel card option • Purpose and length of journey •Elasticities depend upon the purpose of the journey → e.g. rail fare elasticities (ATOC, 2002): -0.2 business; -0.3 commuting; -1.0 leisure •The impact of distance → bus elasticities higher, the longer the journey (magnitude, leisure, alternatives) • However, Preston and others found for rail decreasing elasticities with the distance (less alternatives for rail in longer distances?) •The price elasticity of petrol follows the pattern of low price elasticity in SR and high price elasticity in LR → shift to more fuel efficient cars → increase in tax to limit car use may have little impact Price elasticity and total revenue Q: If operators face inelastic demands, why don't they simply keep increasing the fare? Exercises 1.Is the price elasticity of demand for airline industry in short-haul markets more or less than long-haul markets? Why? 2.What are the factors that influence the elasticity of demand for pilots? 3.The price elasticity of demand for Amtrak, the US rail passenger service, among vacation travellers has been estimated as –1.20. Given that Amtrak faces the market demand for rail passenger trips, what effect will a 15% increase in fares have upon market demand? What effect will the fare increase have upon revenues? 4. • Exercise: Demand estimations •According to demand theory, the market demand curve for transportation is downward-sloping. •You are a transportation economist for rail operator and you are asked to estimate the price elasticity of demand for rail services. Describe in some detail what steps you would follow to obtain the price elasticity of demand. •Suppose that your analysis found that the price elasticity of demand for rail services was –0.78. What impact would a 10% increase in price have upon the quantity of rail services demanded? Do you know whether revenues would rise or fall? • UK price elasticities – urban and regional market SHORT RUN MEDIUM RUN LONG RUN BUS -0.4 -0.56 -1.0 METRO -0.3 ´-0.6 RAIL -0.6 Source: Pauley et al. 2006 UK price elasticities – findings (1) •Fare elasticities varies significantly depending not only on the mode and the time period over which is being examined, but also on the specific circumstances •The short run elasticities increased on average from -0.3 to -0.4 between 1980 and 2004 •The long run elasticities are close to -1.0 and may even exceed -1.0 → implications for fare/revenue policy • Source: Pauley et al. 2006 UK price elasticities – findings (2) •Fare elasticities may be affected by the magnitude of the fare change → greater fare increases produces higher value of elasticities → the differences are greatest for long run elasticities •Fare elasticity is also affected by the current level of the fare relative to people‘s income •Elasticity values increase with short distance and for rail journeys outside London Source: Pauley et al. 2006 UK price elasticities – findings (3) •The response to a fare increase may not be equal and opposite to the response to fare decrease •London is a special case due to size of the agglomeration and congestion •Off peak elasticity values are about twice the peak values •Elasticities for people travelling to work and school tend to be lower than for other purposes •Those with access to cars (males) have higher elasticity values; the evidence about age is not clear cut •As for distance, bus elasticities are higher for very short and very long trips; for rail elasticities decrease with distance • Source: Pauley et al. 2006 CROSS PRICE ELASTICITY Cross price elasticity of demand is a measure of the effect of a change in the fares of one transport mode or transport operator on the demand for the services of another Cross price elasticity •Involves examining two goods or services •Within transport → these services can be examined at different levels → two different modes (train x car) → within the same mode (RegioJet x ČD) → within a same operator (1st class x 2nd class) • Substitutes (Rail and Bus) If the effect of price increase in one good has a positive impact on the demand of the another good – SUBSTITUTES Complements (Car and Petrol) If the effect of price increase in one good has a negative impact on the demand of another good - COMPLEMENTS Freight Interpretation •Elasticities are taken from Canada → the impact of geography and sheer distances •No symmetry in the table: rail-truck ≠ truck-rail → there is no reason to believe that rail users due to increase in rail prices wil react in the exactly same way (by switching to truck) as truck users due to increase in truck prices (by switching to rail) •Rail-water → whilst water is a substitute for the train, the train is far less substitute for water Passenger Interpretation •Little substitutability between air and bus •Bus and rail → complements → why? → intercity markets where bus can feed ta rail services •The plane competes with the train → train does not compete with the plane ≈ change in air fares has an impact on the rail travel demand, but a change in rail fares has little effect on air travel demand Public transport Interpretation •The demand for London buses is far more elastic than in other parts of the country •The underground is a substitute for a bus → the bus is not a substitute for underground •The impact of changes in rail fares on the demand for bus services is very small •The bus and rail in London serve two distinct markets Paulley, N., Balcombe, R., Mackett, R., Titheridge, H., Preston, J., Wardman, M., ... & White, P. (2006). The demand for public transport: The effects of fares, quality of service, income and car ownership. Transport policy, 13(4), 295-306. Paulley, N., Balcombe, R., Mackett, R., Titheridge, H., Preston, J., Wardman, M., ... & White, P. (2006). The demand for public transport: The effects of fares, quality of service, income and car ownership. Transport policy, 13(4), 295-306. INCOME ELASTICITY •Income elasticity of demand is a measure of the responsiveness of demand to changes in income •As real incomes are likely to increase over time, income elasticity identifies potentially growing and falling markets INCOME ELASTICITY Goods Income elasticity Goods Example NEGATIVE INFERIOR BUS POSITIVE (0 < IE < 1) NORMAL CAR, RAIL POSITIVE (IE > 1) LUXURIOUS PLANE Discussion questions •Q1: Will bus services disappear? •Q2: Are air services always luxurious good? •Q3: What is the income elasticity of public transport? Income elasticity in the EU Source: Paulley, 2006 Car ownership effect •Income elasticity for public transport is affected both directly by the increase in income that will be generating an increased demand for travel → but also by increasing levels of car ownership •Increase in income will cause an increase in the demand for rail travel, however, this would be smaller than expected as it will be partially offset by increasing levels of car ownership •The effect will be dependent upon the area → in London the car ownership tend to be smaller → income elasticities of public transport tend to be larger → this is not the case for other major conurbation in Britain British buses Interpretation •Data: National → 11 Regions → County level → PTE = 6 largest English conurbations outside of London •Short run = anything less than a year; Long run = anything over that •Bus as an inferior good •Long run effects significantly larger than short run •Changes in income has the largest effect in PTE cities → in counties they are already using the car British rail Interpretation •Data: This ATOC study was based upon relatively short journeys (less than 20 miles) •As expected, all elasticities are positive → strongly related to the economic importance and pulling power of London •Outside London, there are more alternatives (car) •Q: Is south-east (of Britain) different to the rest of Britain? • Summary: income elasticities •The income elasticities are significantly dependent upon the area •In densely populated area, the impact of rising income will be directed towards rail, in less populated areas towards car ownership •In some areas with dominance of rail and metro, buses will have hard times Appendix: Service (frequency) elasticities Source: Paulley, 2006