Transportation Economics

AG BM 102

Introduction

• Transportation costs are a defining issue for rural America

• Far from markets, far from source of purchased inputs - Alaska

• It makes farming in isolated areas less profitable

• Lowers land prices

Efficient Organization within Market Areas

• How big should schools be?• How big should hospitals be?• How big should milk plants be?

• Area in circle grows with square of radius• Therefore cost of getting more goods

increases, but at a decreasing rate. • The last mile gained more new area than

the one before• Amount of output per square mile affects

collection or distribution costs – Red line is Midwest (no mountains) Blue - PA

Consolidating Schools

• Bigger school can offer more programs• Efficiencies of administration• Richer curriculum• Have a better football team• But students must come farther• Long rides on a school bus

Economics of hospitals

• Small hospitals very expensive to run• Surplus beds• Lack of specialized doctors• Insurance costs• Big hospitals require more patient travel• Plus travel for their families• Helicopter • Hotel stays

Grocery stores

• Large stores have more inventory• Can have more non-foods• Efficiencies of management• Customers must travel farther• Supermarkets killed corner grocery (and

small town grocery)• Further growth created convenience

stores

Market Boundaries

• Transport costs create captive markets• They also create logical market

boundaries• Consider two factories each paying $9/

cwt. for potatoes at the plant gate• If market B wants more milk raises price

and boundary moves

Concluding Comments• Once you understand transport costs some

things in rural America make more sense• How many feed mills are needed?• How many milk plants?• How many Sheetz stores?• How many Papa John’s?• Transportation costs are real and sizeable• They affect behavior in predictable ways