Transport economics the problem of costs
Page 70
If you've noticed an error in this article please click here to report it so we can fix it.
WHEN "costs" become a topic of conversation, there are those who feel like Hitler when culture was mentioned and would like to reach for a gun. The work seems to have unfortunate emotive overtones. Only recently, in discussing an examination syllabus, I pointed out that there ought to be a section on costs. My proposal was greeted by such strong comments on all sides that it was soundly defeated.
Certainly the economist's concept of costs is complicated-but it is not an impossible labyrinth of complexities. There are many types of costs as defined by the economist but their divisions are logical and straightforward. The ' initial division of costs is: (1) those incurred and paid for by a business concern in producing goods or a service and
(2) those incurred by a business but met by society as a whole. The latter are known as social costs-an example would be persistent noise and vibration in a bottleneck section of road caused by innumerable vehicles but paid for in poorer health and the loss of amenity and good environment which the noise and vibration imposed on the society living in the area. The social benefit cost would be the calculated gain to the community by relieving this bottleneck with a
by-pass route.
In regard to (l)-costs which are met by the business concern-these are divisible again into (a) fixed, overhead or supplementary costs and (b) variable, prime or direct costs.
Fixed costs, as their name implies, do not alter in total whatever the utilization of the facility to which they relate. The cost, for example, of a vehicle's licence remains fixed no matter how many miles are run during the term of the licence. In the same way, the rent of the garage will usually be fixed and not vary with its utilization. Of course, over a sufficient length of time these fixed costs can and will be altered by rent increases, changes in vehicle taxation or if more garage space and additional vehicles are acquired by the firm.
Variable costs fluctuate directly with out*. If more miles are run by a vehicle, its fuel consumption is increased together with additional wear and tear on tyres and other components.
The importance of distinguishing between fixed and variable costs is seen in a situation where fixed costs are high in relation to total cost. Here there are great economies to be gained by increasing the output-the larger the output, then the lower the fixed cost per unit of output. If a vehicle runs 30,000 miles in the course of a year, the cost per mile of its licence and insurance is one-third of what it would be if only 10,000 miles were covered. Indeed, if fixed costs are an important element in running a vehicle, the variable costs of running additional miles may be quite small.
But if this is the case, the operator, in his quest for increased business, may well set his charges at levels which do little more than cover only the variable or marginal costs of the extra traffic. Thus, where a business is conducted with many competitors and a high percentage of fixed costs, there is a considerable downward pressure of prices. A firm involved in such an activity may well find that it has not retained sufficient from its charges to cover the costs of the fixed factors -and, of course, these must be renewed in the long term if the concern is to remain in business.
The complications, then, in "costs" come not so much from complexities in the principles involved but from the variety of subdivisions. The main sub-divisions are covered here-there are others which are really only refinements of these main divisions.