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Transportation Economics

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.

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Transportation Economics

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  1. Transportation Economics AG BM 102

  2. 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

  3. Efficient Organization within Market Areas • How big should schools be? • How big should hospitals be? • How big should milk plants be?

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

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