Transportation and the Economy

Transportation and economy cannot be discussed in isolation of each other. The movement of people and goods has become more and more necessary due to realization of more and more individual needs. Today people need expedient movement hence the existence of various transportation modes to get prepared to meet the numerous challenging needs and situations.

Transportation facilities are constructed because they provide benefits to society as a whole or as individuals. Good transportation facilities raise the level of the entire economy by providing ready transportation of goods; they make easier the provision of community services like police and fire protection, medical care, schooling, and delivery of mail; they are of assistance in problems of national defence; they open added opportunities for recreation and travel.

The efficient operation of a transportation system has great economic significance. The following model illustrates this point. Consider a certain commodity that is desired in one location, provided at a point A and costs OC at the production. The community desiring the commodity, located at point B, is the distance AB from A. The maximum price that people will pay for the commodity is shown on the vertical axis as OE, at community B. If the original, inefficient transportation system is utilized, it will cost a certain amount, CH, to ship the commodity from A to B. The CD portion of the cost line is known as the fixed cost, whereas the DH portion of the line is the cost per kilometer or slope. With this inefficient system, the total cost at B is OH, a price greater than the maximum cost limit in the community B or OE. Now assume the transport system is improved. The cost per kilometer or slope is slope is reduced and the transportation variable cost line becomes DJ. The cost at the community now becomes OJ, well below the maximum cost of OE. The market for the community would be expanded to community B, while production continues at A. The reduction in transportation costs between points A and B gives the commodity ‘place utility’. In the less efficient system, the goods would have no value because they would not be sold at the market. The more efficient method of transportation creates utility; the goods now have value at point B.

Figure 1.1 Landed cost with old and new Transport Systems