The table below tracks UK Fuel costs against that of other European Countries
It is true to say that taxes have been rising, the cost of fuel has increased considerably. Typically 1/3 of a companies cost is wages (34% Dennis Dixon Ltd) and 25% fuel (26% Dennis Dixon) this major proportion of the costs rising constantly over a sustained period of time is clearly something which would have adverse effects on the industry. The fiscal policy is such that it could said that firms are being unnecessarily restricted compared to their European counterparts. Of the 12000 firms that have disappeared since 1997 it is correct to assume that many of these will have been casualties of the higher taxes, which mean that they cannot compete with foreign firms with lower costs. It is possible to say that this taxation regime may not be directed specifically at the haulage industry but more of a general policy of trying to account for negative externalities that are created by transport, or a more cynical person may suggest to bulk up the Government’s coffers due to the inelastic nature of transport.
Market Pressure from Substitutes
However all British firms have to deal with the same tax situation, and not all firms compete for European journeys, indeed or are close enough to the southern coast to want to compete for European journeys. So the tax situation cannot be the only reason why 12000 firms have disappeared, especially when one considers that although the southern region has had a considerable loss of businesses in Road Haulage the reduction has been spread through all regions. Because of this difference in how the fiscal policy effects firms it would be wise to analyse other factors that could have had an effect. One example of this is competition from other industries providing similar goods.
The alternatives to using Road Haulage firms include Air and Rail for domestic haulage. However as mentioned these methods are less suited to business to business logistics because aeroplanes and trains can only stop where there is an airport or station whereas a Lorry can stop anywhere. As some taxes have risen which effect the road haulage industry it is logical to suggest that some of the trade has been lost to the alternatives. By using raw figures for million tonnes transported per year we can see how much trade has been lost or not from road to air and rail.
Tonnage Moved (Tonnes) by method.
The Figures suggest that since the advent of the latest Labour Government in 1997 Road Haulage usage has been affected with a quantity moved of 4% or 62m tonnes, whilst Rail haulage has been largely unaffected with a downward trend continuing. Air usage has risen considerably up 65% over 6 years or 0.927m tonnes. The upward trend in Air Haulage has continued from ’92 to’98 which does not take account for any fiscal policy changes that have been brought in since the new labour Government. As we only have one figure for a post 1997 year it is not possible to say whether air freight has been effected, therefore rail is fairer comparison.
To assess whether competition has been lost to Rail and Air haulage since 1997 cross price elasticity of demand (XЄD) can be used. This will assess the strength of any substitute or compliment relationship. This is important so to determine whether competition from substitutes have resulted in changes in the market, rather than changes due to the fiscal policy since 1997.
This approach assumes that companies only decide on method of transportation of goods on cost. However this assumption generally holds true and so XЄD is an appropriate method to use.
It is expected that the reduction in the tonnes moved by road haulage since 1997 and the stagnant movement of the billion tonnes per kilometre ratio to be due to a lower cost of rail and air transport costs.
Below the relevant information is listed to be used in the XЄD formula.
The data above lists figures for different years. This coursework piece is concerned with what has happened since 1997 therefore statistics have been used from 1997 onwards.
XЄD = (%▲DX) / (%▲Py)
Road = -3% Rail = 5.6% XЄD = -3/5.6= -0.536 (3.d.p)
Road = -3% Air = -15% XЄD = -3/-15= 0.200 (3.d.p)
The results show that rail costs have risen and yet there has been a fall in demand in road haulage which would suggest that the two goods are compliments, whether this is true will be examined later. The results also show that the drop in demand for Road Haulage has coincided with a drop in price for air haulage and so the goods are substitutes to each other.
The level of elasticity here is important. It is clear that the increase in rail of 5.6% has had a similar but not as greater percentage change in the amount demanded of road haulage. This would lead to the conclusion that the relationship is very slightly inelastic or unitary elastic. On the other hand the relationship between Air and Road freight is an inelastic one, big changes in the price of air freight have only had a small change in the amount demanded of road haulage. This can be seen clearly in the diagrams below.
The result of these elasticities is that it is possible to conclude that Road haulage has suffered at the hands of competing industries, Whether rail or air have had a bigger role to play in this change and the extent to which this relationship is true will be looked at further on in this section. It is important to look at what these changes mean;
The goods have changed their equilibrium level of consumption for the above relationship to occur. However this will not have been in one move rathermore in stages or shifts as shown in the graph below using rail haulage as an example
The graph above shows that as the market position changes the maximum amount of rail haulage that an be consumed decreases and the maximum amount of road haulage increases, due to changes in demand and the resultant reduction or increase of firms in the market to service this demand. One would expect that the increase in output shown in the PPF graph above would increase profits and so attract more firms into the monopolistically competitive market. It is essential to examine the effects of this, as to judge the role fiscal changes have had on the market
The result of this would suggest that more firms would enter the market due to the profits to be made in the industry which is shown below.
However this has not been the case as the PPF for the haulage industry shown above. The growth in the capacity of road haulage as shown in the PPF graph has seen the billion tonnes per km rise from 124.6 in 1991 to 149.6 in 1997. It has been stagnant ever since. This would suggest that there is no growth in the market. The reduction in firms in the market would suggest that the market is becoming more concentrated as firms try to gain market power and would suggest that the market is over populated and that profits cannot be made until firms drop out of the market as shown below
It is feasible that the above situation is what the Road Haulage industry is in. This would lead to the analysis that either the industry is going through the natural cyclical effect around its equilibrium, or demand is low due to an exogenous shock to the economy, or finally average costs are artificially high and are crippling the economy. This could be due to taxation. However it is not the aim in this section of the coursework to assess which is true, but to assess whether the price elasticity situation is true and that the losses of the rail haulage have been the gains of road haulage. The above would suggest that it is internal changes within the industry that have been the main factor, however this does not rule out any effects from cross price elasticity, could it be masking the extent of the change? It is essential to assess this.
The idea that there is a cross price elasticity of demand between road and rail haulage assumes that there is a legitimate link between the Road and Rail haulage industries, that they are genuine substitute goods. It should be examined whether the circumstances surrounding the different types of haulage warrant the classification of ‘not linked’ rather than substitute goods or compliment goods. For example Rail mainly transports coal. In the last decade there has been a ‘dash for Gas’ which has resulted in many coal fired Powerstations being converted to gas fired Powerstations to meet agreements such as the sulphur protocol and the Kyoto agreement of the early ‘90s. If they were not linked then it would change the relationship between the downturn in Rail and upturn in Road Haulage. For there to be proper connection between the two industries they have to have similar characteristics. It is not enough to say that the industries both transport goods and therefore they will be substitutes. For example in a simplified situation Road Haulage might only transport food and was not able to transport Metals, whereas Rail was only able to transport metals and not able to transport food. Although both industries transport commodities their markets are not linked and are unable to overlap so it is impossible the substitution effect to occur. This situation would never exist but it is important that we examine the specifics of each market as to ascertain whether they are true competitors. The table below outlines the commodities that both industries mainly transport.
We can see that Road Haulage mainly transports food, drink and tobacco, these are perishable goods. Perishable goods are characteristically low weight and not transported in bulk because the retail industry cannot sell enough before it perishes to warrant transporting in bulk. Indeed food, drink and tobacco is usually transported to numerous individual shops or chain stores. Transporting by rail is not possible because of the huge infrastructure cost of having a railway line to every shop that is to be supplied, if it were to be done the price of transporting to each shop accounting for the infrastructure cost would become restrictive and planing laws and urbanised areas means railway lines cannot be built.
Rail haulage is characterised by the transportation of coal primarily. This is a non-perishable good and is very heavy and is needed in large quantities (with the exception of the insignificant home use market). Also it is generally only needed at a small number of locations across the country, eg. Powerstations. The cost of adding a railway line to a Powerstation as a proportion of the cost of the site when building it is tiny compared to the cost of adding a railway line to a shop like with the example above. The suitability of the Road network for the transportation of coal is dubious. Powerstations need a massive amount of coal; UK lorries can only carry 40 tonnes at a time. This would result in the need for large convoys of trucks which is an inefficient use of resources. E.g. many lorry drivers are needed in a convoy where a one train could carry the same amount and only needs one driver, here there is an inefficiency in the use of labour. Another reason is that lorries have to stop and start, and with such heavy loads, more fuel is used, a limited resource, a train does not have to stop and start and only needs to have one engine to pull the load whereas the lorries have to have tens of tractor units to pull the same amount. Therefore using a train is a more efficient use of resources, and therefore will be cheaper per tonne carried. The result is that the Road Haulage network is unsuitable for crude resources such as Coal and Metals.
However the second most transported material for the road haulage industry is crude minerals. This would suggest that the road network is suitable for the transportation for all crude resources. Minerals are often used in the construction industry. It is not efficient to set of a railway to a construction site to transport minerals and other building materials because the demand for the resource is not permanent, a Powerstation or Steel Factory’s demand for primary resources is. Therefore the possibility that the Road network is suitable for coal on the basis that it transports a lot of a good with similar properties should be discounted.
Although there core markets are not transferable between the two industries we can see from the table below that there are some goods that are transported on road and rail.
It can therefore be concluded that the suggestion that Road and Rail haulage industries have a substitutional relationship is not completely true. Although the peripherals of their markets have a substitutional effect as we can see from the table above the core markets have an inelastic demand for each type of transportation of goods because of the unsuitability of other methods. As it has been proved that it is true that Road and Rail are not real substitutes it would follow that the downward trend in Road usage is not due to the substitutional effect of more usage of the rail network. This is compounded by the fact that Rail usage has declined in other markets than coal as the table below shows. (we should ignore coal because this has declined because it is no longer demanded for political reasons rather than coal being transported by other methods).
Market Behaviour
We have come to the conclusion that the market is not particularly affected by competition from substitutes. It could be as a result of other situations. An important factor in changes within an industry is how the market is reacting, and can be changed and shifted as a result of changes to the Fiscal Policy. It can be reasonably assumed that the haulage market falls into the category of a monopolistically competitive market. This is because although the products are usually thought of by the public as being completely homogenous they are in fact not. Firms spend a lot of money in advertising, image and gimmicks on an attempt to differentiate themselves from the competition. For example Eddie Stobbart has created a brand image because of the drivers uniform, clean trucks and simple distinctive livery, they even have their own merchandise shop. If firms have differentiated themselves this far from other firms the market cannot be assumed to be a perfect market, this is compounded by the fact that the perfect market ideals are only theoretical. To be monopolistically competitive the firms in the industry have to be small in size and are not interdependent and reliant on decisions on other firms to set their own price. This is generally true of the Haulage industry. As the market in monopolistically competitive changes in the market are frequent. This may be the case in the Road Haulage market, and so it is important to assess what changes may be taking place in the Road Haulage market.
The market is not as strongly monopolistically competitive as other markets such as the car industry. The result of this would be that firms will drop out of the market as they are bought out by larger firms who can force prices down due to their economies of scale, standard effects of market pressure. This is a possibility as the market has lost 12000 firms but has maintained the same volume. This might be because of fiscal changes, and creating a shift in average costs from AC2 towards AC1;
Does the market have relatively high barriers to entry? This would help to understand why firms are dropping out of the market but not being replaced by new firms. This market has been traditionally seen as a market with low barriers to entry as a truck and driver is all that is needed to compete. Traditionally there have been many sole traders in this industry, however it can be seen that this trend is changing. Firms are increasing in size to compete, for example Denis Dixon have expanded their fleet to survive from 22 to 36. This suggests that the Minimum efficient scale to operate the firm is increasing. As shown below
This means to compete more lorries are needed and so it can be said that barriers to entry are rising. The need for greater economies of scale to compete would explain why 12000 have dropped out the market since 1997. How does this change in the market effect the relationship to fiscal policy? If firms need to be bigger to compete and survive in the market then the casualties in the industries can be explained thus, rather than through increased taxes. However it could be said that it is because of the greater taxes that firms need to be bigger, gaining greater economies of scale to compensate for the increased running costs.
Changes in Market Position due to Fiscal Policy changes
This is the overall situation in the market traditionally, however there have been problems in the market with many companies complaining that the climate has changed and that UK firms can no longer compete. They have alleged that this is because of excessive taxes which drive up costs to a point where other European firms can provide the service and make profit at what it costs the UK firms to complete the job. If the costs have been driven up we can represent this on the market situation graph seen below and compare what happens when a foreign firm has a different situation.
We can see the huge difference that an increase in costs can have on the profit margin, although still making supernormal profits conpany number 2 is making considerably less money than firm 1 and is charging a higher price for it. Could this be the case in the UK Haulage industry? It is confirmed that costs in the industry have increased since the labour Government took power in ’97; £0.85 (1995) versus £1.18 (2001) (Source: Dennis Dixon Ltd) but how can we be sure that this increase is not down to inefficiency but tax? With the example above this particualr firm has expanded its operations from 42 eomplyees in 1995 to 72 in 2001 and fleet size up from 22 to 36 in the same time period, and turnover is up 65%. However are they being anymore efficient other than a normative judgement of the company is seemingly sucessful therefore must be efficient.
Efficiency of Firms in relation to the changes in Fiscal Policy
Efficiency is achieved productively when the marginal cost of the last product produced is at the lowestpoint of the Long Run Average Total Cost as shown below.
However it is not to be expected that any firm is perfectly productively efficient. It is also not possible to assess on average the efficiency of firms in the industry as data for this is not available for obvious reasons. To gain a broader insight it can be assumed that inefficient firms will be driven out of the market by more efficient (and often larger as they have access to economies of scale) firms. We have access to data relating to the amount of firms in the industry.
It would normally be expected that when costs rise that a proportion of that be past onto the customer unless it is a perfectly elastic market. As it was highlighted early on, the market has little competition from other haulage methods such as rail. It can be therefore concluded that the market is relatively inelastic so long as there are no special circumstances. In the case of the road haulage industry it is fair to say that the market acts normally and we can take it as granted that the market is relatively inelastic. If the most of the extra cost is past onto the consumer then demand will decrease as we can see in the graph below.
As the graph shows most of the added costs due to the higher taxes are past onto the consumer and there is a resultant drop in demand. This drop in demand is not actually shown over the period of 10 years but is shown from 1997 when the Labour Government came to power in the UK.
In 1997 it was estimated by the RHA (Road Haulage Association) that there were 65,300 firms, yet four years later in 2001 they estimate that only 52,600 firms existed. This reduction in the firms could because of the lack of efficiency which meant upon the increase in tax the firms were unable to cope. This would normally suggest that this would result in a reduction of the industry as a whole. However this is not necessarily true. In 1997 there were 422,000 Vehicles over 3.5 tonnes on the road, yet in 2001 this figure has risen by 8,000. This suggests that the market has no problem in coping with the taxes, other than casulties of small inefficient firms and that more efficient firms have prospered in a decreasing market.
A point which the table above addresses is that the amount of lorries on the road have increased, yet the amount moved has decreased. This does not logically fit, as a reduction in the amount of goods in tonnes moved would suggest the need for fewer lorries. However the average weight of goods carried needs only to decrease over the period for the need for lorries to increase to carry the lighter goods. This suggests that raw tonnage does not fairly represent the demand for haulage. If we took the figures for billion tonnes per kilometre we would be able to have a true reflection of the demand.
This table shows that the demand level has not changed in the post 1997 era to any considerable degree and so it would suggest that the rising costs in the industry have contributed towards the change. The Haulage industry has complained that the fuel price escalator has caused a considerable rise in the costs of running lorries. This is true, the price of fuel in Britain is the dearest in Europe as proved earlier. However, it would be Government failure not to account for negative externalities when controlling fiscal tactics towards industries. A recent research piece conducted by the Oxford Economic Research Associates concluded that the taxes levied on HGVs only account for 70% of the costs they impose on the public, and only 59% of the damage they do to the roads. This would suggest that the Road Haulage association are calling for protectionism rather than a fairer deal.
Effects of Monetary Policy
Here we can see that after the 1992 ERM problems (A Monetary Policy decision) the market expanded rapidly until 1998 where is peaked and has stayed unchanged. Even here we can see that between 1997 and 2001 the demand for haulage has stayed unchanged and would therefore neutralise any demand for the extra 8000 vehicles that found themselves onto the road. Perhaps the market has reached saturation point and there are too many vehicles on the road for the level of demand available.
Another point that this table highlighted is the boom period between 1993-1998 as this coincides with a boom in the economy and the subsequent peaking also. The background to the economies decline and boom is related to the exchange rate. In 1992 Britain crashed out of the ERM as it could no longer keep within the 6% fluctuation rate with other European currencies, because over £200billion were sold overnight and the UK Government was only able to buy £17billion. The overnight result was that the UK pound was devalued by over 20%. The end result of this was that it became cheaper for foreign countries to buy British goods than goods from other countries. This was down to the purchasing parity theory. This could be used to explain the current problems. The slack in the economy hid the real costs of the road haulage and it only now that turbulence has stopped and the slack has been taken in the economy that the industry is now competing that fiscal policy is accounting for the real costs.
Effects of the Exchange Rate on Goods
The Theory of purchasing power is relevant to the UK economy at the point of 1992. For example previous to the collapse of the GBR£ there were 2.9DM to £1. This meant that a pair of jeans costing £20 in Britain would cost 58DM in Germany if bought from Britain. After the 20% collapse the GBR£ was worth 2.3DM therefore the jeans would cost just 46DM. British firms would have to produce the jeans for £15.86 at the old exchange rate of 2.9DM:£1 to be able to sell them on for 46DM. This drop in value of the GBR£ resulted in British goods becoming more affordable on the world market, as other countries who had not suffered overnight deflation had to become more efficient to compete with British goods, or became no longer any cheaper. However for Britain to import goods it would become more expensive as we now needed more pounds to buy the same good pre-crash.
Britain gained much trade from this drop in value of the pound and an export led recovery followed from this time of relative recession. The table below tracks the relationship between the French Franc (FF) and the Pound (£). We can see that from the overnight drop in 1992 the pound started to strengthen in the late nineties where it once again became strong.
We can see in both drops at the time of ‘Black Friday’ both exchange rates devalued themselves by around 20% the period between 1992 and 1997 remained fairly static as Britain was in a state of boom in the economy and excess demand in the markets was being absorbed. Due to the purchasing parity theory it was cheaper to buy British in the lull between 1992 and 1997 as the GBR£ was not worth as much as it had been pre-1992. However we can see from the charts that the pounds value began to rise as inflation set-in in the late nineties. This suggests that it became more expensive to buy British goods, a reversal of the example of jeans given above. To keep the price of British goods down in an inflating economy an industry would have to become more efficient, shaving costs and profit margins. Could it be that firms were unable to become more efficient and therefore firms could no longer compete with European Firms? This could be true and would have a greater effect on the road haulage companies, as not only would their service become more expensive, but UK goods would be more expensive to foreign nations, and therefore naturally the demand for UK goods would decrease as we can see in the graph below.
During the time of greater exporting due to the devalued pound there would have been a greater demand for British Goods and therefore greater demand to move goods about, and so greater demand for Road Haulage. This would allow for more firms to exist in the market than could otherwise have existed under the pre-1992 conditions. Also the expanding economy would allow for firms which were inefficient to mask their lack of efficiency because of the comparative advantage the exchange rate will have given them. If this were the case when the exchange rate changed due to inflation in the late 1990s their inefficiency would no longer be hidden by the favourable exchange rate, which would mean they were no longer cheaper in a market that was decreasing in size. (Please see earlier figures on tonnage moved for years in the late ‘90s)
Efficiency or greater Taxation?
We can either put the decrease in the market size down to inefficiency which had previously being masked by the exchange rate leading to firms collapsing, or increasing taxes, coupled with the relative cost of British transport going up in Europe leading to firms collapsing which were otherwise efficient. It is not possible to measure efficiency accurately or productive to assess the size of firms that have gone out of business, but we are able to see how costs on the industry have changed.
We can see here that the total operating costs have increased overall to 80% more than they were in the base year of January 1990. Fuel, which has the greatest tax levy has increased by 126% of what the cost was in January 1990. Fuel is the major cost after Wages, yet wages have not risen by nearly as much as Fuel (226 vs 175 and 168). The overall operating cost has not risen as dramatically as fuel which suggests that other areas have not risen by nearly as much as fuel bringing the overall increase down. An efficient firm theoretically should be able to keep costs down to inflation or possibly less than inflation if costs were to be reduced due to change in working practices (if taxation does not change) however even accounting for inflation and taxation increases the figures are too high to suggest that the firms are being truly efficient. However this is very much a normative judgement, and so as such cannot be treated as fact. If we were the take the idea that British Haulage firms were not being efficient it would fit into the idea that the market only expanded because of the exchange rate situation and the resultant effects of the economy. If this were to be true then the claims from the haulage industry that it is the taxation that is crippling them beyond any ability to compete with European firms would not hold as much weight considering the above evaluation of the situation. This compounded by the evidence that taxes currently do not cover nearly as much of the damage to the road network or the public than what HGV lorries create. This would suggest that currently firms are inefficient and unable to cope with the costs involved in the industry. Already growth of firms in the market is being seen which will give technical and managerial economies of scale. The greater economies of scale could perhaps absorb the inefficiency in the market, or maybe eradicate it.
A call for Protectionism?
A reduction in the rate of taxation on haulage firms would presumably help Haulage firms, giving them a similar advantage to the one that was afforded in the mid-nineties by the deflation of the pound. However would this mean that the social costs of haulage, the negative externality of the pollution that is caused by the movement of goods, and amount of the earth’s finite resources have to be used up for the activity to commence would not be counted for? Haulage firms in general do not contribute to cleaning the atmosphere and fixing the damage that is caused by acid rain, global warming etc. and so taxation on the service they provide helps fund cleaning up the pollution. Therefore by reducing the tax on Road Haulage the Government would not be making the Road Haulage firms pay near the true cost of their activities. (The Government cannot make the firms pay the whole true cost as it is not known what effects the pollution could have in years to come). And so in effect the Government would be subsidising the Road Haulage Industry, as they would still have to pay the clean up bill if taxes were reduced. So is the Road Haulage industry calling for protection?
Let us look at the effects that a reduction in taxes would have on the industry. If taxes were reduced then supply of British Road Haulage would be increased, as the price comes down as we can see below.
We can see clearly that British firms would be able to compete better with foreign firms if a protectionist measure of reducing taxes and therefore subsidising the negative externalities of the business was put in place. This is caused by an increase in supply, and tax is only one method of achieving it, SREDUCED TAX could be achieved by greater efficiency instead of a reduced tax.
Conclusion of Factors
To conclude the factors that have been evaluated as to why the Road Haulage industry has been affected badly are competition from other methods of Haulage, competition from European Firms and efficiency the fiscal policy and the monetary policy (exchange rates). From this it has been discovered that Haulage has not been effected by and considerable amount from other methods because of the lack of suitability of these methods in transporting goods from the core markets of the Road Haulage industry (for example perishable goods such as food and drink). It can be said that European competition has risen considerably in the late nineties, especially in the south-east, for example in the Dover area it is estimated that 55% of trade has been lost to European competition. However the reason for this imbedded in other factors. Is it the monetary policy or the fiscal policy that has caused the lack of efficiency to become a major factor?
In other words what factor is to blame for the change in the economy resulting in it becoming harder for British firms with their current level of efficiency to compete. We have seen that taxation has increased, especially on fuel, the second largest cost to the road Haulage firm. This results in the firm being unable to supply as much due to the cost of running the vehicles. However the fuel escalator was introduced in 1993, and in the late nineties British firms had no trouble competing with European firms therefore taxation has been a problem for firms in years of growth (late nineties). The monetary effects that this country has had in the last decade were serious deflation overnight in 1992, followed by a sustained period 1992-1997 at this new rate, followed by a continued rise in the value of the pound from 1997 into the new century. This inflation means that it costs more for foreign firms to buy British goods. This inflation kills British industry who compete on the world market as well as the domestic and use Haulage. As exports fall due to inflation the demand for road haulage decreases. However inflation is caused by more consumption in the home market therefore demand in domestic market increases slightly, but this is offset by the value of the trans-europe market which British Firms cant compete on.
It could be said that the increase in demand during the low inflation period of the mid-nineties which allowed firms to prosper masked the effects of taxation, so when this was taken away the further increasing taxes have started to have their effect. So which factor holds more weight, is it Mr Blair’s Fiscal policy or is it the monetary conditions? If we look at the geography of where firms have been disappearing from it is clear to see that the South East has been the worst hit, it is no coincidence that these firms are closest to the continent and it is therefore correct to assume that they do more European business than other regions. The Northeast like the rest of the country has been suffering as well, yet they do not have so much competition for European journeys from this area because of the sheer distance away from the continent. Also there isn’t as much business up north as manufacturing has decreased, or uses other methods of transport. Perhaps the problem in the north is different to that of the south? It seems that taxation is not too much of an issue for domestic market as demand is relatively inelastic as air and rail haulage cannot compete. With European journeys our taxation regime is prohibitive because of the exchange rate, if it were not for the strong exchange rate then taxation would not have been a problem. I would also suggest that the firms are going bust because of the competition with European firms for European journeys. An equilibrium will be reached where there is the correct amount of firms for the market as shown in the graph below, basically the market is behaving monopolistically with firms dropping out until profit can be made, but it is the inefficient firms that drop out first.
It can be seen from the weight of the evidence that the double effects of the exchange rate no longer masking any inefficiencies in firms and allowing for competition free business and the increasing tax burden on road haulage firms to cover externalities that some smaller firms have seemingly been unable to cope. The increased willingness of British Firms to use foreign carriers has had an impact in a limited area only therefore the root of this problem is in the inefficiencies of the Haulage industry resulting in the calls for protectionism.
Weighting of Factors
Even if inefficiency of British firms is the main reason for the changes in the British haulage industry it is important to assess the role that the other factors played in this outcome, and their weight in relation to this issue.
The below weightings are normative judgements based on the research and reasoning in this coursework. 1 is the greatest weight.
- Efficiency of Firms – minimum efficient scale or economies of scale is not being achieved and so firms are unable to cope with tax rises, exchange rate differences and competition from Europe. This problem has resulted in all the other issues effecting firms. Causal effect and so greatest weighting.
- Market Changes – firms are increasing in size and taking over other firms to gain advantages such as economies of scale. Aggressive marketing campaigns such as Eddie Stobbart. Market is behaving monopolistically competitive. These changes to increase efficiency have resulted in fewer firms. Data shows market isn’t shrinking, but stagnant, so fewer firms must be due to market changes.
- Monetary Policy and the Exchange Rate – Increasing value of point over last 5 years has meant that it is harder to compete with foreign firms . Slack in economy from 1992 has been taken up and the market is having to cope with a lack of excess demand for British goods. This helped inefficient British firms survive.
- Fiscal Policy – Taxes are rising above inflation with fuel price escalator and high road fund tax results in British firms having increased costs and so profits are dropping. However this only has an effect as firms are not being run efficiently at the moment – trends for bigger firms show changes. Not a major reason why some firms are suffering in north-east – just too small to compete.
- European Competition – Only in south-east has this had a big effect where most of their trade was for European journeys, perhaps there were too many firms for local trade now that cant compete for European journeys. Not particularly big reason why north east has been effected.
- Cross Price Elasticity of Demand – Not effecting road haulage as rail and air are not proper substitutes.
Links
Inefficiency of firms means some can’t survive in changing times.
Inefficient because: market changes have introduced greater monopolistically competitive traits and can’t compete with foreign firms
Can’t survive because: Exchange rate means British haulage is more expensive that European haulage and taxes are greater.
Bibliography
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Economics Fourth Edition Begg, Fischer and Dornbusch
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Economics Third Edition Anderton
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Economics New Approach Anderton
- Road Haulage Association statistics
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Department of Transport statistics ()
- Goods Vehicle Operating Costs 2003, DFF International
- Dennis Dixon Ltd
- The Economist Newspaper
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(Historical interest rates)
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(Historical Fuel costs Europe wide)
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(Haulage statistics)
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(Air Freight statistics)
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Office of Rail Regulator (Rail Freight Statistics)
Adam Craig 06.05.2003
