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?

• Transportation costs are real and sizeable

• They affect behavior in predictable ways