The State and its role - Transport Policy and Planning in Great Britain - page 144

judgement. Economists would maintain that the intellectual discipline is nevertheless
instructive and that decision-makers should pursue these lines of argument as far as
they reasonably can, so as to minimise the area in which judgements (of values or
about uncertainties) have to be resorted to.
The various types of 'market failure' can be grouped as follows:

1 external effects

2 imperfect information

3 public goods

4 natural monopolies

5 very large investments.

These, and their consequences for the main types of State involvement in transport,
are discussed below. (For further reading see Quinet and Vickerman 2004 or Button
1993.)

1) External effects

For markets to produce outcomes which maximise welfare a key condition is that the
transactions between producers and consumers should take account of all the costs
and benefits arising, not only to themselves but to anyone else who may be affected.
Transport which is supplied in a market form has a price which essentially reflects
the internal costs and benefits of those involved in the transaction (i.e. producers and
consumers). Thus if I make a bus journey I pay a fare which covers the immediate
operating costs of the company concerned (staff costs, fuel, vehicle maintenance etc.)
plus a share of its fixed costs (vehicles, garage facilities etc.). The revenue received
by the company from passengers as a whole, after paying for all its costs, must give a
return on the money tied up in the business which is sufficient to attract and retain
the funding supplied by its owners (shareholders) or other investors. The fares charged
must be less than the value which passengers place on the activity made possible by
making the journey (e.g. a shopping trip) or on the travel time savings or other benefits
they receive by making the journey by this means rather than any other. (If this weren't
the case then they either would not travel at all or else travel by an alternative, cheaper
mode, such as walking.) Assuming the transport provision is being made in a freely
competitive environment (another key condition) pressure will be exerted on suppliers
to keep their prices at the lowest possible level consistent with generating an adequate
return. In this way the number of passengers is maximised and therefore the aggregate
benefit maximised also. (Economists would put a number of provisos on each of the
statements for them to hold true in particular circumstances but this is the gist of the
argument.)
However bus travel, or any other form of transport, alters the conditions experienced
both by other travellers ('users' of the transport system) and by other groups in society
('non-users'). Thus if I and a proportion of other travellers have opted to make our
journeys by bus rather than, say, by car then we will probably be generating benefits to
motorists through less traffic congestion and to residents and others in the form of better
safety and environmental conditions. Conversely motorists in making their journeys will
worsen the conditions experienced by bus users, pedestrians, residents and so on.
If roadspace were charged for directly (which it is not) then it would be possible to
adjust the prices paid by the various classes of user to reflect their interacting costs and