Recall that prices for a supplier are costs for a consumer. At some stage in the supply process a supplier become a consumer to provide some portions of supplied goods and services.
Transportation costing and pricing are functions of rules and policies. There are no absolutes or general methods in use for all modes. Costs are functions of 'accounting rules'. The problems of un ambiguous costing increase as the size and age of the entity increases.
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Mature and large transportation organizations like the railways companies or transportation departments of government present examples of the difficulties of determining costs that are suitable for all uses.
The general rule that sunk cost or past cost should not effect decision about the future applies. Only future cost commitments should effect the decisions about future operations. The costs that are suitable for financial purposes may not be suitable for operational management or pricing.
Improvements in data collection and analysis can be expected to improve the quality of costing. Improvement in economic and social theory and practice are required to improve pricing.
Transport service prices often have little relation to costs in detail. The notion of cost based pricing relies on accurate estimation of the demand and usually requires considerable levels of cost aggregation and redistribution.
Prices are usually set to achieve some overall objective in relation to the market for the service that can be provided. Ideally costs tend to be specific to particular items of service. Pricing blurs the costs of providing service because one is based on providing the service while the other is based on realizing revenue from the market.
A suppliers prices are the consumers costs. In a market based economy it is assumed that the aggregated costs of service will be equalled (or exceeded) by the revenues as represented by the aggregated prices. This may however not be true according to current accounting rules.
Sunk costs are committed economic opportunities. These costs are borne by some segment of the socio economic system regardless of the accounting system. They represent lost opportunities. Bankruptcies are a form of redistribution of the differences between accounted costs and revenues.
Most transport systems require large amounts of fixed plant and Equipment which results in large sunk costs. When these costs are borne by a supplier who, in the business sense, is isolated from the consumer, the suppliers profit sensitivity to market changes is often very great. The consumers feel little or no responsibility for the costs and the risks are therefore quite high.
The record of public (i.e. for hire) transportation operations reflects this phenomenon. Pricing for maximum net return from the market regardless of demand satisfaction becomes the obvious strategy.
In the past much effort has been expended to restrain indiscriminate and antisocial use of tactics that result from this strategy. Much of the railway regulation is based on restraining the profits and providing service on unprofitable operation in the name of the pubic good.
If a significant part of the system fixed cost can be transferred to the users, which is the case with private transportation such as automobiles, trucks, etc., then the costs and payoffs are to a larger extent the responsibility of the consumer.
The user is then much more responsible for the level of service provided and the potential and assignment of responsibility for individual choice is improved. Under such arrangements it may be assumed that the overall system efficiency may be lower, but this may in fact not be so and the users will be afforded better opportunities to optimize their own activities.
All transportation pricing and supply strategies result in conflict between various individual users and suppliers. For a particular transport demand, the supply strategy will be indicated by the objective statement of how the various conflicts are to be structured.
Many argue that transport benefits (and costs) first of all accrue to the user. These are generally easier to evaluate than the secondary costs and benefits that are also present.
Present trends suggest that policies favouring the maximum practical amount of user and supplier freedom are favoured. The concept of balanced transportation means that modal selection should be made on the basis of economic (social ?) efficiency using limited and/or artificial competition as the basic regulatory devices.
Attempts at utilizing portions of the consumer surplus to extend supply beyond the apparent break even point seem to be responsible for some public transportation policy as well as for some of the concepts associated with the provision of minimum service.
The uncertainty of objectives and associated effects adds greatly to the uncertainty which must be recognized in the processes used for selection of transport supply and their results. The basic economic assumptions of an informed public and rational decisions on an economic basis seem unable to account for many observed behavioural patterns.
In a society with considerable surplus wealth there will be some consumption of resources for goods and services which are not strictly necessities. When such a society champions the increase of individual freedom of choice it can expect the selection of activities which from some points of view seem irrational. Goods and services which at some point in time are classed as luxuries may become necessaries.
The individuals selection of services such as transportation will rarely be made on the basis of such precepts as the common good or even on the basis of lowest apparent individual cost.
Much private transport activity such as sight seeing, motor boating, skidooing, etc., is very costly and is only in the common good from the fact that it is consumption.
Many apparently different costs, benefits, responsibilities, etc., can be determined for the same action by the preselection of what is included in the accounting. The most common rationale is based on what is individually significant, internal factors and what is external or not individually significant.
Many apparent anomalies such as the usual lack of consideration of external transport factors in the development of some large building and other intense activity locations result from the selection of what is internal or significant to this particular project and what is external, i.e. what can be considered to be someone else's responsibility.
This is the 'Challenge of Abundance'. The way we do things at all levels from individuals to nations suggests that we can expect little basic change but only an overall improvement in defining what is internal to a particular decision and what is external.