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A Companion to Urban Economics - Arnott and McMillen - Part 4

P A R T IV Urban Transportation Transportation economics is a well-defined field of economics. Its subfields can be categorized along three dimensions: transport mode, passenger/freight, and supply/demand/policy; maritime freight supply is therefore a subfield | A Companion to Urban Economics Edited by Richard J. Arnott Daniel P. McMillen Copyright 2006 by Blackwell Publishing Ltd I PART I V Urban Transportation A Companion to Urban Economics Edited by Richard J. Arnott Daniel P. McMillen Copyright 2006 by Blackwell Publishing Ltd Urban Transportation Transportation economics is a well-defined field of economics. Its subfields can be categorized along three dimensions transport mode passenger freight and supply demand policy maritime freight supply is therefore a subfield according to this categorization. Supply deals with both technology and industrial organization and policy subsumes regulation. Urban transportation economics by definition deals with transportation in cities. But as with urban economics its core material has been determined by the intellectual history of the subject. Two bodies of urban transport economic theory the theory of congestion and applied discrete choice theory are especially important. Both have been extensively adapted to problems in other areas of economics and the principal developer of each is a Nobel Prize winner - William Vickrey and Daniel McFadden respectively. The theory of marginal cost pricing has a long and distinguished history. The basic idea is that individuals will make socially efficient decisions if they face the social cost of their decisions and enjoy the social benefits from them. When they do not there is an uninternalized externality. Arthur Pigou proposed taxation as a way to internalize externalities. The best-known example is that of pollution. When a firm emits pollution that it does not pay for the marginal social cost of its production exceeds the marginal private cost. Since the firm does not face the full cost of its production it overproduces. This externality can be corrected by imposing a tax on the firm for each unit it produces equal to the difference between its marginal social and marginal private costs. Imposition of such a tax will cause the firm to face