Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
Centres for Transport Studies
MSc EXAMINATION
MSc in Transport
MSc in Transport & Business Management
Transport Economics: T-04
Closed Book
Answer THREE questions from FIVE
Answer each question in a separate answer book
All questions carry equal marks
Explain the first fundamental theorem of welfare economics, sometimes referred
to as the ‘invisible hand’. What does it mean when an equilibrium is Pareto
efficient?
(35%)
Map out why the existence of public goods and externalities might undermine the
efficiency of a private market for the supply of such goods and services, providing
applied examples from transport. Explain the reasons and consequences of the
examples you provide.
(40%)
If we fix the price of a bus service, at a level below an equilibrium price arising
from a competitive market, how will this change the equilibrium state of the
market? How might private providers of this bus service respond? How will
consumers respond?
The Mayor of London asks Transport for London (TfL), the monopoly provider of
Underground train and bus services, to replace its second-degree price
discrimination model with a single flat price. Explain what TfL’s current pricing
policy is, and what the Mayor of London is suggesting. How will this impact
TfL’s revenues and profits, assuming most of TfL’s average cost line is below its
demand line?
(50%)
Explain the concept of consumer surplus, and describe how the Mayor of
London’s policy idea changes consumer surplus, assuming a downward sloping
demand curve. What type of supply organisation makes decisions based partly on
consumer surplus?
(30%)
In the case where TfL’s average cost line is above its demand line, what are TfL’s
profits under its current pricing strategy and under its new pricing strategy in these
circumstances? Assume that the demand, marginal revenue and prices from part
(a) are unchanged. What factors might explain TfL pursuing such a supply
strategy?
(20%)
What are the key steps of Cost and Benefit Analysis (CBA)? Why do we
encounter optimism bias, and how might it be mitigated?
(20%)
Consider that a private consortium is proposing to build a bridge over the Tagus
river in Portugal. They are keen to evaluate the cost and benefit of this project,
which they will build and operate until year 5, after which it will be handed over at
zero price to the Portuguese government. The initial investment is Euro 1 billion in
year 0. Only in year 2 will the bridge be operational, and from that year the
government will pay the consortium Euro 300 million, while the annual running
costs will be Euro 50 million. These payments will be made during years 2 to 5
only. Assume zero cost and income in year 1. Calculate the present discounted
value of the project by assuming that the rate of interest is 10%. Show your
calculating process. Comment on the results and their implications by discussing
whether or not the company should be involved in the project.
(40%)
Next, assume that the private consortium owns contaminated land close to the
bridge that they will be able to sell and realise a gain of Euro 500 million in year
1, but only if the bridge is built. Does this change whether or not the company
should build the bridge? The company paid Euro 150 million for the land before
the bridge was under consideration; it is not included in the cost benefit analysis
and has no resale value without the bridge. Explain the concept that best describes
land purchase cost and its exclusion from the CBA.
(40%)
Introduce the concept of land value finance and discuss with reference to
elasticities. What are the three components of capitalised land value of
accessibility?
(30%)
You are involved in the planning and financing of a subway line in Phnom Penh,
Cambodia. A suggestion is made to implement a betterment tax on residential
districts along the subway. Explain this suggestion and discuss how it may
negatively influence the path of the subway line. Why might a betterment levy on
commercial property be less controversial?
(35%)
Ultimately, the decision is taken to finance the subway line with a joint
development programme. Discuss what a JDP entails and what are its advantages?