Shifting Economic Gears in Transport

You can’t swing a dead cat without hitting another story about driverless cars, shared taxis, new mobility or other tech oriented developments in passenger travel. Invariably, these stories treat the technological advance as the Big Change for travel, where being able to summon a cab on your mobile phone changes everything we know about the world. However, looking at the future of transportation through just a technological lens misses the biggest economic shift underway—the shift from high average cost/low marginal cost travel to low average cost/high marginal cost travel. While this shift is enabled by technology, it is not just technology.

Eliminating drivers will not automatically reduce transportation costs to something approaching zero (I will explain this in a different post, but the short explanation is that drivers do far more than just drive.).  Cars will still cost money to build, maintain and operate. Recently I saw a quote from Emily Castor of Lyft where she said even if autonomous vehicles cost $500,000 each the cost of a Lyft ride will remain the same as it is today. This claim suggests that even companies in the middle of “disrupting” transportation don’t really know where the field is going or what the relationships between capital and operating costs are. In short, capital costs cannot be separated from operating costs.

Consider the current cost of driving in the US. Once you buy and insure a car, driving is extremely cheap for most trips. Most trips begin and end with free parking, and to drive a few miles requires fuel costs measured in nickels and dimes, not dollars. (A car that gets 20 miles per gallon will use $0.50 in fuel for a five mile trip if gas is $2 per gallon, for instance.) Automobility in the US features high average costs (some fraction of the fixed costs of buying and insuring plus the cost of travel) and very low marginal costs (the cost of an additional trip).

Now consider the cost of taxis (or transit). You don’t pay any fixed costs, but the cost of an individual trip is high. A taxi trip of five miles might cost $10 or more, where the same marginal cost for driving was $0.50. A transit trip will cost a few dollars as well, plus additional travel time. Considering these differences in marginal costs, I may drive for a bag of potato chips if I’m in the mood, but I’m not going to pay an Uber or taxi to take me to the Circle K and back. Potato chips aren’t that valuable.

This shift in costs will affect the travel we undertake, and many firms will aim to get the costs of travel as low as possible. In short, as the cost of travel increases per trip, we will travel less.

As an example, when I lived in New York City, I would sometimes use Amazon Prime Now for two hour deliveries since they charged $6 to deliver while my subway fares would have been $5.50. Now that I live in Phoenix, I either ride my bike or make a short drive with free parking that saves me most of the delivery fee. In NYC I transferred my trip to a delivery person. Hopefully that person will use the transport systems more efficiently than a bunch of individual travelers out for sacks of coffee beans.

The shift to higher trip costs that reflect fixed and operating costs will be the factor that affects how and how much we travel in the future. If trip costs are high, then we will travel less and demand for effectively zero cost travel—think walking and biking—will increase. If trip costs remain low, then we will travel more by car.

How low can firms get the costs of travel? Probably not as low as they think. There are cost they don’t control: including paying for infrastructure through fuel taxes, road pricing, parking charges, congestion pricing, etc. Plus someone has to buy and maintain all those vehicles that will get hired, and those costs won’t get lost in the haze of public subsidy (hopefully). Somebody will want a return on their capital investment—just like a real company!

(This is a guest post by David King)