Scale Economies and Transport Externalities
Dr Bernard Kornfeld
Disclaimer:
The views and opinions expressed in this presentation are those of the author and do not necessarily reflect the
official policy or position of Baxter Healthcare.
Scale Economies
• Scale economies represent local optimisation of capital efficiency within the
factory.
• Long run average firm costs improve as productive efficiencies benefit from
– Technical economies
– Purchasing economies
– Administrative savings
– Financial savings
– Risk bearing economies
Scale Economies Driving Scale Diseconomies
• Scale economies drive
intensification and agglomeration of
firm assets
• This increases proximity to human
and resource factors of production
and to markets
• Part of these costs are borne by the
firm but part is treated as an
externality
– personal cost of travel to work
– negative externalities of freight
Scale Diseconomies of Personal Travel
In Calendar Year 2012 Australian
passenger vehicles travelled 167.5
billion km1,2
• (As a comparison, Pluto is currently
4.9 billion km from Earth3)
• Negative externalities include:
– Accidents
– Pollution (air, water, noise, etc)
– Congestion
– Social opportunity costs
ABS 9208.0 - 12 months ended 30 June 2012
Excludes motorcycles and buses
3 NASA New Horizons Web Site
4 Kockelman 2008
1
2
Scale Diseconomies of Freight
2012 Australian Domestic Freight:
585.8 billion tkm
• 290.6 billion tkm rail2
• 194.0 billion tkm truck1
• 100.9 billion tkm sea2
• 0.3 billion tkm air2
1
2
ABS 9208.0 - 12 months ended 30 June 2012
BITRE Yearbook 2014
Negative Externalities of Freight
• Accidents (fatalities,injuries, and property damage)
• Emissions (air pollution and greenhouse gases)
• Noise
• Costs associated with the provision, operation, and maintenance of public
facilities.
• Traffic congestion
• The analysis reveals that external costs are equal to 13.2% of private costs and
user fees would need to be increased about threefold to internalize these
external costs
1
Forkenbrock (1999)
External Costs of Freight: Australia 2005
1
Laird (2005)
$3 to $5 billion per annum
Scale Economies and Transport Externalities
• Scale economies encourage intensification and agglomeration of firm assets.
• This results in scale diseconomies such as freight costs as well as negative
externalities such as social, societal and environmental costs.
• Process intensification may provide an opportunity to realise scale economise
in a smaller more distributed infrastructure.
• This could reduce (not eliminate) negative externalities from transport and
therefore make an important contribution to sustainable manufacturing.