Chapter 3

TRANSPORTATION REGULATION AND PUBLIC POLICY

Chapter Objectives:

After reading this chapter, you should be able to do the following:

1. Understand the bases for the regulation of transportation in the United States

2. Appreciate the roles of regulatory agencies and the courts in regulating transportation

3. Obtain a knowledge of previous and current regulations affecting transportation

4. Understand the need for a National Transportation Policy

5. Identify and assess the need and roles of public promotion in transportation

6. Appreciate the role of user charges

7. Obtain a knowledge of transportation safety and security regulations in the United States

Chapter Overview

Transportation has long been a critical component of every world economy. From the development of
the Egyptian empire because of the Nile River to the establishment of colonies on the east and west
coasts of the U.S. because of ocean transportation, transportation has allowed civilizations to expand
through trade with other countries. Because of its impact on a nation’s economy, many countries have
developed policies and regulations for transportation to assure a safe, reliable, and fair transportation
network for their citizens.

This chapter will examine the basis of this regulation, along with the roles of the regulatory commissions
and the courts. A discussion of the development of transportation regulation from its inception at the
Federal level in 1887 to its role today will be presented, along with the national transportation policies
directing and promoting transportation and national security.

Nature of Regulation

There has been a long history of governmental regulation and control. The amount of governmental
control and regulation has increased as the United States has grown and prospered. The expansion of
governmental influence, however, has been necessitated to some extent by the increase in the scope of
activity, complexity, and the size of individual firms.

The imperfections in the marketplace in a free-enterprise economy provide the rationale for
governmental control. This control can take one of several forms; maintaining or enforcing competition,
substitute regulation for competition or the government can assume ownership and direct control.

The institutional framework for regulating transportation is provided by federal statute. A perspective on
the overall legal basis for regulation is important to the student of transportation.
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Common and Statutory Law
The legal system of the United States is based upon common law and civil or statutory law. Common
law relies upon judicial precedent, or principles of law developed from former court decisions.

Statutory law or civil law is based upon the Roman legal system and is characteristic of continental
Europe and the parts of the world colonized by European countries.

There is a very close relationship between common law and statutory law as many statutes were in effect
copied from common law and need to be interpreted by the courts.

The regulation of transportation began at the state level with the development of state laws, and later
federal laws which gave rise to independent regulatory commissions.

Role of the Independent Regulatory Commission

The federal government is set up the Interstate Commerce Commission (ICC) which exercised
legislative, judicial, and executive powers. On December 31, 1995, the ICC was abolished and replaced
it with the Surface Transportation Board (STB).

The role of the STB has been greatly reduced as congress intended the marketplace to be the primary
control mechanism for rates and services. Today, the STB exercises economic controls primarily over
railroads.

The Federal Maritime Commission (FMC) administers the regulations imposed on international water
carriers. The FMC exercises controls over the rates, practices, agreements, and services of common
water carriers operating in international trade and domestic trade to points beyond the continental
United States.

The Federal Energy Regulatory Commission (FERC) was created to administer the regulations
governing rates and practices of oil and natural gas pipelines.

Role of the Courts

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The courts are the sole judges of the law, and only court decisions can serve as legal precedent
under common law. The courts make the final ruling upon statutes and the interpretation of the
legislation. The courts act as a check upon arbitrary or capricious actions, actions that do not
conform to statutory standards or authority, or actions that are not in accordance with fair
procedure or substantial evidence.

Over the years, the courts had come to recognize the ICC as an expert body on policy and the
authority on matters of fact and, to some extent, the STB.

Safety Regulations

Various federal agencies administer transportation safety regulations. Some of these regulations
are enacted into law by Congress, whereas others are promulgated by the respective agencies.

These include the Federal Aviation Administration (FAA) governs the operation of air carriers and
airports. The Federal Motor Carrier Safety Administration administers motor carrier safety
regulations, and the National Highway Traffic Safety Administration has jurisdiction over safety
features and the performance of motor vehicles and motor vehicle equipment. The Federal
Railroad Administration exercises railroad safety regulations, and the Coast Guard is responsible
for marine safety standards for vessels and ports. The newly created Pipeline and Hazardous
Material Safety Administration (PHMSA) contains a Pipeline Safety Office that is responsible for
hazardous materials standards for oil and natural gas pipelines and a Hazardous Materials Safety
Office that manages hazardous materials regulations for all other modes of transportation. The
National Transportation Safety Board is charged with investigating and reporting the causes,
facts, and circumstances relating to transportation accidents.

The states exercise various controls over the safe operation of vehicles and on occasion these
safety regulations can conflict with federal safety regulations.

After the September 11, 2001 transportation safety has taken on a new dimension of national
security. Securing the nation’s transportation system from terrorism became a major governmental
focus but the free flow of commerce within the 50 states makes it very difficult to increase
security measures without curtailing commerce.

The responsibility for transportation security has been given to the Department of Transportation
and the Department of Homeland Security and to agencies within the departments.

State Regulations

The states establish various transportation safety and exercise limited economic regulation over
the transportation of commodities and passengers wholly within the state. States generally cannot
impose stricter regulation than that imposed on that mode at the federal level.

The intrastate economic regulations vary from state to state, but they are generally patterned after
federal economic regulations and in 1994 the federal government eliminated the intrastate
economic regulation of motor carriers except household goods carriers.
The determination as to what constitutes commerce subject to state economic regulations is
generally based on whether the shipment crosses a state line. The move within the state from the
distribution center to the final destination can be considered interstate commerce and subject to
federal regulations.

Development of Regulation

Transportation does not operate in a completely free-market environment. Transportation

regulation has been a major force shaping the transportation industry.

Without a sound transportation system, the level of economic activity, the exchange and
movement of goods and services, would be greatly limited and the well-being of the citizens
reduced. Thus, government involvement has been directed toward ensuring that the public has
equal access to an economically viable transportation system.

Current Economic Regulations

The air carrier industry is deregulated and cargo and passenger rates are not controlled.

Economic regulation over pipelines has been transferred to the Federal Energy Regulatory
Commission.

As most water carrier operations are exempt from economic regulation is a now moot issue.

The Surface Transportation Board administers the remaining economic regulations exercised over
railroads.

Motor carrier economic regulation has been drastically altered as the requirements to file tariffs
and the control over rates has been removed. Carriers are liable for the full value of damaged
freight but are permitted to use release value rates to limit their liability and any motor carriers can
contract with shippers.

Antitrust Laws in Transportation

The Sherman Antitrust Act first established antitrust regulations. The key points of this act are
that trusts and other devices used to restrain trade are illegal as are monopolies.

The Clayton Act described some other practices that would be interpreted as attempts to
monopolize or actual monopolization. The Federal Trade Commission (FTC) is the primary
overseer and enforcement agency in this business practice area.

The repeal of those parts of the Interstate Commerce caused this practice to become subject to
the antitrust laws. Collective rate making over single-line rates of rail, motor, air, and household
goods carriers is not allowed by law.

The Robinson-Patman Act of 1936 which prohibits price discrimination to the buying and selling
of goods and it may be possible that this law might be applied in carrier pricing.
There are two types of antitrust violations can occur, per se violation and the rule of reason.
Carriers my be subject to antitrust regulations and because transportation has been subject to
antitrust laws only since around 1980 shippers are also subject to these same laws and are at an
equal risk of committing an antitrust violation. This theory has not yet been fully tested in court.

TRANSPORTATION POLICY

The federal government’s policy toward transportation is a composite of federal laws, rules,
funding programs, and regulatory agencies and there are more than 60 federal agencies and 30
congressional committees are involved in setting transportation policy.

WHY DO WE NEED A TRANSPORTATION POLICY?

The transportation system ties together the various communities of a country, making possible the
movement of people, goods, and services. Transportation is fundamental to the economic activity
of a country.

An efficient transportation system is fundamental to national defense and an efficient

transportation system reduces the amount of resources consumed for national defense.

The purpose of transportation policy is to provide direction for determining the amount of
national resources that will be dedicated to transportation and for determining the quality of
service that is essential for economic activity and national defense.

The federal government has been a major factor in the development of transportation facilities
such as highways, waterways, ports, and airports.

DECLARATION OF NATIONAL TRANSPORTATION POLICY

The ICC Termination Act of 1995 included a national transportation policy to provide direction to
the STB in administering transportation regulation over railroads, motor carriers, water carriers,
and pipelines.

Policy Interpretations
Although the declarations of national transportation policy are general and somewhat vague, they
apply to STB regulated modes and as such, air carriers are excluded as are exempt carriers.

The STB must administer transportation regulation in such a manner as to recognize and preserve
the inherent advantage of each mode; this inherent advantage is the innate superiority one mode
possesses in the form of cost or service characteristics over other modes.

Safe, adequate, economical, and efficient service is not totally attainable but when lives are
involved, safety takes precedence over economical and efficient service.

Providing adequate service has been construed to mean meeting normal demand. The STB must
consider the economic condition of carriers in rate rulings so as to foster stability of transportation
supply. The STB was charged with the responsibility of encouraging fair wages and working
conditions but no attempt was made to interpret these conditions.

The policy statement regarding reasonable charges, unjust discrimination, undue preference, and
unfair competitive practices is merely a reiteration of the common carrier obligations.

The cooperative efforts between the federal and state governments have not always been smooth
but the judicial decision was that only the federal government could regulate interstate
transportation.

The stated goals of the national transportation policy are to provide a system of transportation
that meets the needs of commerce, the U.S. Postal Service, and national defense.

Who Establishes Policy

National transportation policies are developed at various levels of government and by many
different agencies.

EXECUTIVE BRANCH

Many departments within the executive branch of government influence (establish) transportation
policy including appointment of individuals to head the various transportation agencies. The
Department of State is directly involved in developing policy regarding international
transportation by air and water.

The Maritime Administration and the Military Sealift Command, Military Airlift Command, and
Military Traffic Management and Terminal Service influence various aspects of ocean and air
transportation.

Others such as the Department of Energy, the Postal Service the Department of Housing and
Urban Development (HUD) and the Army Corps of play a role.

The Department of Transportation is the most pervasive influence of policy at the domestic level.

CONGRESSIONAL COMMITTEES

The laws that are formulated by Congress and within the two Senate committees, the Committee
on Commerce, Science, and Transportation and the Committee on Environment and Public Works
have transportation responsibilities. The House of Representatives’ transportation committees
include the Transportation and Infrastructure Committee and the Energy and Commerce
Committee.

In addition to the above standing committees, numerous other congressional committees have an
impact on transportation including the Appropriations Committee, Senate Banking Committee,
Housing and Urban Affairs Committee, House Ways and Means Committee, or Senate Finance
Committee.
REGULATORY AGENCIES
The STB and FMC are independent agencies charged with implementing the laws regulating
transportation.

JUDICIAL SYSTEM
The courts have been called upon to interpret laws or reconcile conflicts. The role of the courts is
basically to interpret the meaning of policy as stated in laws, regulations, and executive orders.

INDUSTRY ASSOCIATIONS
Industry associations in transportation such as the Association of American Railroads (AAR) and
the American Trucking Associations (ATA) serve two basic purposes: establishment of industry
standards, and policy formulation and influence. The other modes also have associations as well.

Shippers are represented by the National Industrial Transportation League (NITL) and the
National Shippers Strategic Transportation Council (NASSTRAC). Both are active before
congressional bodies, regulator agencies, and carrier groups.

One of the most important governmental policy issues has been the public promotion of
transportation. All of the above groups and associations have been involved over the years in this
important area.

PUBLIC PROMOTION

This section presents an overview of the public sector transportation planning and promotion
activities. Promotion connotes encouragement or provision of aid or assistance so transportation
can grow or survive.

Transportation Project Planning in the Public Sector

Transportation project planning is the process whereby government entities review the needs or
demands of a region or population segment, develop transport alternatives, and usually propose
or implement one of them.

Transportation project planning is a public activity as public transportation processes can open
trade or movement where private actions have not or would not have been enticed to do so for
financial gain alone.

Many forms of transportation require large capital investments that would normally discourage or
prohibit private investment.

Public planning of transportation is generally found in situations where environmental or social

needs override financial ones. It is apparent that public planning of transportation involves a
different viewpoint and set of objectives than does capital investment analysis in private firms.

AN APPROACH TO PUBLIC PLANNING PROJECT ANALYSIS

Public planning agencies compare the initial costs of a project to the financial, environmental, and
measurable social benefits to everyone affected by the project.

The major costs of a project include those expenses typically involved in private projects and
could include delay or congestion.

The benefits of a project include any measurable benefit to the agency, other agencies, and the
public at large and while some are easily quantified, others pose analytical difficulties.

The timing and time value of funds is an important part of any capital project analysis. By
including benefits for 25 years or more, it is easy to inflate the ratio or cause it to be above the
break-even point when it would not be otherwise. Conservative risk analysis states that costs
should be analytically considered higher and benefits lower than what a first-glance measure
indicates.

Public planning involves many of the basic concepts inherent in private project planning, but the
application is different since costs and benefits to all parties affected by the project. Thus, costs,
benefits, and Aprofits@ are measured for society as a whole in tangible and intangible ways.

Air
The domestic air system received the benefits of several government programs such as the FAA
air traffic control system. Another direct air system benefit is the subsidy system that applies to
short and medium non-jet flights to cities that are unable to support high traffic volumes. In recent
years, The Air Deregulation Act of 1978 accelerated the growth of commuter airlines which has
enabled the regional airlines to discontinue service to small cities.

The U.S. Postal Service is a major revenue source for the industry while state and local agencies
help promote the airline industry through air terminal development and construction. The airlines
rent terminal and hangar facilities and pay landing fees for each flight.

The FAA provides aircraft construction and safety rules as well as pilot certification and the
National Transportation Safety Board investigates accidents so that many can be avoided or
reduced through aircraft specification or flight procedures.

Through government ownership, many airlines are subsidized so those countries can operate their
airlines for various purposes such as national pride.

On domestic traffic only American flag carriers may originate and terminate domestic passengers
and freight within the U.S. This home-flag requirement serves to protect the domestic lines.

Several forms of user charges such as the Airport and Airway Trust Fund gather funds which are
used for airport facility projects on a shared basis with local agencies.

Motor and Highway

There is no direct promotion to motor carriers themselves, but indirect benefit comes to the
industry through highway development which is done with government funds.
The Federal Highway Administration is largely devoted to highway research, development, and
safety. It also is charged with certain repair projects on critical parts of the Federal and Interstate
Highway System.

The National Highway Traffic Safety Administration is responsible for highway safety and
provides administrative regulations for certain minimum automobile safety features.

The Federal Motor Carrier Safety Administration imposes strict standards on truck safety, which
affects all highway users.

One of many highway related “user charges” is the gas and fuel tax which is the source funds to
build and maintain the highway network. Other sources include a federal excise tax on tires while
states obtain revenues through vehicle registration fees or a ton-mile tax. Tolls are a form of user
taxes on many turnpikes and bridges.

Major controversies are currently taking place with regard to Federal Highway Trust Fund and
state user taxes. Even though 96 percent of the interstate system has been built, the fuel tax
continues to be collected and accumulated in the fund. Some states have earmarked some of these
funds for education and other uses while industry groups seek a greater share for highway
development and improvement.

Rail

The railroads currently can avail themselves of direct assistance from the Regional Railroad
Reorganization Act of 1973, the Railroad Revitalization and Regulatory Reform Act of 1976, and
the Staggers Rail Act of 1980. Another form of funding has been available as a subsidy to lines
that are abandoned by railroads but that states and other groups continue to operate.

The Federal Railroad Administration has become a major source of gains in technology as well as
safety. The Transportation Technology Center at Pueblo, Colorado once owned by the FRA has
been privatized and is managed by the AAR.

Amtrak was created to relieve the railroads of the burden of passenger traffic while providing
needed services to the public.

Domestic Waterway Operations

The inland barge industry receives two major forms of federal promotion, one from the Army
Corps of Engineers and the second from Coast Guard. Each provides services and benefits that
support the industry. There is now a fuel tax user charge to cover the cost of certain
improvements.

International Water Carriage

The Maritime Administration (MARAD) administers construction differential subsidies (CDS) to

offset higher cost of U.S. ship builders. The survival of the U.S. shipyard is viewed as essential to
U.S. military capability. There are operating differential subsidies (ODS), which cover the
higher-cost increment resulting from having higher-paid American crews on ships.

The U.S. cabotage laws state that freight or passengers originating and terminating in two U.S.
points can only be transported in ships constructed in the United States and owned and manned by
U.S. citizens. The United States also has a cargo preference law that stipulates that at least 50
percent of the gross tonnage of certain U.S. government-owned and -sponsored cargoes must be
carried by U.S. flagships.

MARAD exercises decision powers over ship design and construction and plays a major role in
the routes. This form of control is unique to the transportation industry in the United States.

The rationale for such extensive assistance to this one industry is that a strong fleet is a vital part
of national defense sealift capacity in the event of war.

The Shipping Act of 1984 is a further example of the U.S. policy toward supporting a strong U.S.
ocean fleet. The act was designed to reduce the regulation on foreign ocean shipping with the
following goals:

 Establishing a non-discriminatory regulatory process for common ocean carriers with a

minimum of government intervention and regulatory costs;
 Providing an efficient and economic transportation system in the ocean commerce of the
United States that is in harmony and responsive to international shipping practices; and,
 Encouraging the development of an economically sound and efficient U.S. flag fleet
capable of meeting national security needs.

Pipeline
The pipeline industry receives no public financial support, but it has benefited in a legal sense from
the right of eminent domain.

Miscellaneous Forms of Promotion

Various other activities directly or indirectly benefit the transportation industry such as those
performed by the DOT. Other research and development studies are conducted by the
Transportation Research Board and the National Science Foundation. The Department of Defense
continually examines methods to improve shipping, and many improvements spill over into the
commercial area.

TRANSPORTATION PROMOTION IN PERSPECTIVE

Two major promotion concepts are user charges and nationalization. User charges are used to pay
for some or all of the services used by a carrier or mode while nationalization represents an
extreme form of public assistance.

User Charges
User charges are assessments or fees charged to carriers by public bodies for a variety of reasons.
Examples here are airport landing fees, road tolls, and state fuel tax when it is applied to road
maintenance. A user charge also can serve to equalize intermodal competitive conditions.

FORMS

User charges are present in three basic forms which are an existence charge, a unit charge or
relative use. Examples include a driver’s license issuing fee, tolls and gas mileage or an increased
truck registration fee for heavier vehicles.

A form of nonuser fee also has arisen in recent years where a tax partially pays for rapid transit
development and while many persons do not, or might not, ever use the rapid transit system, they
do bear some of its costs.

Nationalization

Nationalization is an extreme form of public promotion. It basically consists of public ownership,

financing, and operation of a business entity.

TRANSPORTATION SAFETY

The federal government has assumed the responsibility of ensuring the safety of travelers. Federal
safety regulations cover all aspects of transportation operations from labor qualifications and
operating procedures to equipment specifications. The primary objective of the safety regulations
is to establish a minimum level of safety for transportation providers to maintain.

The policy of safe transportation has been extended to the specification of standards for
transportation vehicles.

Hazardous materials transportation poses the greatest threat to public safety and the movement of
hazardous materials and hazardous wastes has been subjected to considerable regulations. These
regulations overlap somewhat because of the overlapping jurisdiction of the regulatory agencies
originating and enforcing the rules.

The police powers of the Constitution grant the states the right to protect the health and welfare
of their citizens and the states have established safety regulations governing the safe operations of
transport providers.

Transportation safety matters have been extended to include environmental safety for all modes.
One effect of these myriad safety regulations is an increase in the cost of transporting people and
goods but society feels that the benefits of safety regulations more than offset the direct cost.
More government oversight is likely in the future.

Transportation Security

The Department of Homeland Security (DHS) was established in response to the events of 9/11.
Its goal is the mobilizing and organizing the nation to secure the homeland from terrorist attacks
DHS is charged with protecting the security of the transportation system. The security programs
and regulations are administered through the Coast Guard (CG), Customs Service (CS), and
Transportation Security Administration (TSA).

The Coast Guard patrols the U.S. coastline and internal navigable waterways and can stop a
vessel from entering an U.S. port, board the vessel, and prevent any undesirable freight from
being offloaded from a vessel.

The TSA administers the air passenger security-screening processes at U.S. airports. TSA is
testing various security devices and procedures to ensure the safety of passengers as well as
reduce delays resulting from the security-screening process. TSA is moving into the freight sector
as well, starting with air cargo. It has also conducted a transit and rail inspection program for rail
passenger and luggage screening, similar to that performed in the airline industry.

The Customs Service has been focusing on implementing security measures for cargo entering the
United States. CS has established the 24-hour rule that requires shippers to electronically transmit
a description of the cargo 24 hours before loading and CS can block any prohibited cargo items
from being unloaded.

As the security measures increase, the impact on the transportation system and transportation user
is increased transit times and cost.

Study Questions

1. Discuss the rationale for the economic regulation of transportation.

In an industry where a natural monopoly can occur, the government has three options to bring the
industry to a more competitive state: nationalization, antitrust laws, or economic regulation.
Since transportation is vital to our economy and the defense of our nation, a competitive industry
is necessary. Only two modes of transportation have natural monopolistic tendencies: pipeline
and railroad. Since pipelines are privately owned, there is no need to regulate them economically.
However, the railroads were economically regulated in 1887 because antitrust laws were not yet
created and the U.S. tends to not nationalize industries. This was done to prevent monopolistic
abuses that were being practiced by the railroads against small farmers and to guarantee a
competitive industry.

2. How has common law provided a basis for the government’s regulation of transportation in
the United States?

Common law provides the court system with an opportunity to interpret the intent of law and
make decision that then change the law. This is necessary as conditions in an industry and society
changes. This was especially important in the early days of economic regulation of transportation
since no precedent existed in the U.S. for regulating an industry. Common law especially fits well
with the concept of common carriage which requires transportation providers to serve all
individuals equally and without prejudice or discrimination.
 3. Discuss the role of antitrust laws in transportation during the regulated versus deregulated
eras.

Economic regulation prescribes what a company can, or must, do. For example, the zone of rate
freedom included in the Staggers Act of 1980 defined the limits in which a carrier could raise rates
without ICC intervention. Antitrust laws prescribe what a company cannot do. For example,
companies cannot collectively set prices with the intent of purposeful discrimination. Between
1887 and 1890, transportation providers were subject to only economic regulation, since antitrust
laws were not yet passed. With the enactment of the Sherman Antitrust Act 0f 1890, railroads
were put into a position where they were subject to both sets of laws. By precedent, economic
regulation was used to regulate the railroads and then motor carriers (1935) and domestic water
carriers (1940). The Reed-Bulwinkle Act of 1948 formally exempted carriers from antitrust laws
and allowed the ICC full regulatory and policing powers over the transportation industry.
However, with the legislation passed in 1980 and subsequently 1995, antitrust laws are now
exclusive in monitoring the practices of the transportation industry since economic regulation
(with the exception of captive shipper decisions still under the purview of the Surface
Transportation Board) no longer exists.

4. How do the police powers of the Constitution affect transportation?

Police powers are defined by the Tenth Amendment of the Constitution and basically gives the
states and the federal government the right to enact laws to protect the individual. For
transportation, this concept is used in defining the difference between interstate and intrastate
commerce, which is also defined by the Commerce Clause of the Constitution. In effect, any
shipment that begins and ends within the borders of a state are the responsibility of that state.
Any shipment that begins in one state and ends in another falls under federal responsibility.

5. Why does the United States need a national transportation policy? What purpose does it
serve?

Transportation is vital to the economic development and defense of the U.S. and to the welfare of
its citizens. With the numerous federal agencies and congressional committees overseeing
transportation in our nation, an overall policy is necessary to define the overarching goals of our
transportation network. The policy is intended to provide a safe, secure, and non-discriminatory
transportation network that fulfills the need for commerce, defense, and individual freedom. It is
a mechanism that can be used when decisions are being made by the various agencies regarding
transportation.

6. Analyze the major issues addressed by the ICC Termination Act national transportation policy
statements.

a. Elimination of the ICC and creation of the STB. All economic regulation of motor carriers and
domestic water carriers was eliminated and economic regulation of rail was transferred to the
STB.
b. Antitrust immunity for collective ratemaking is retained for motor carriers.
c. The concepts of common and contract carriage are eliminated.
Note: The student can pick any of the items for discussion.
 7. Unlike many industrialized nations, the United States has fostered private ownership of
transportation companies. What is the rationale for private ownership?

Many different points can be discussed to favor both privatization versus nationalization.
However, private ownership is fostered by a profit motive which, could be argued, promotes a
higher focus on customer service. Private ownership also provides investment and growth
opportunities for companies which helps drive our economy. Private ownership also does not use
tax dollars to subsidize unprofitable operations. Finally, private ownership is the business model
our nation has adopted for all other industries.

8. What is the rationale for the public promotion of transportation?

Since transportation is vital to the economy and defense of the U.S., public promotion of this
industry is a valid decision. Investments in highways benefit both individual citizens as well as
companies. Maintaining our domestic waterways encourages economic development and provides
safety to communities which are prone to flooding. Providing operating and construction
subsidies to the U.S. ocean industry provides vessels for the Merchant Fleet. Providing airport
infrastructure allows for the efficient movement of both people and freight. All of these
promotional activities benefit our country as a whole.

9. What are transportation user charges? What is the purpose of such charges?

Transportation charges are fees assessed by a government agency for the use of government
provided infrastructure or for the privilege of vehicle ownership. The purpose is to recoup
promotional subsidies/investments from those using those subsidies/investments. For example,
fuel taxes and landing fees are assessed on those consuming fuel or landing at an airport.
Registration fees are assessed to those given the privilege of owning vehicle (e.g., an automobile).
These fees are also reinvested in current infrastructure for its improvement. A good example is
the Highway Trust Fund which receives its funding from a per gallon fuel tax at both the state and
federal levels. The rationale is the more fuel consumed, the more miles travelled and the faster the
need to repair and maintain the state and federal highway system.

10. Discuss the advantages and disadvantages of increasing regulations relating to transportation
safety and security. Be sure to include both transportation providers and transportation users
in your discussion.

While economic regulation of transportation has been almost totally eliminated, regulations
pertaining to safety and security in transportation has increased. The reason for this is obvious. A
transportation accident, whether a train derailment (random) or terrorist threat (planned), can
cause damage to property and death to individuals. As such, taking actions to prevent these
instances is warranted. For example, over the last year the number of rail shipments of crude oil
from North Dakota and Canada has grown significantly because of the growth of oil drilling in
those areas and the lack of a pipeline infrastructure to get the oil to refinery sites. During this
time, several derailments have occurred causing significant damage and death to the communities
affected by the derailment. To help prevent these derailments, the federal government has
mandated initiatives such as positive train control (PTC), new brake requirements, and new
designs for oil tank cars. These actions will certainly help prevent some derailments. However,
with these initiatives comes costs. The railroads will be investing billions of dollars over the next
several years to implement these changes, increasing their costs in both infrastructure and
operations. Ultimately, however, these increased costs will get passed to shippers in the form of
higher rates who will then pass those costs onto the ultimate consumer.

Another example was the creation of TSA. This government-funded agency (using tax dollars) is
intended to make air travel safer for passengers through more intense screening procedures for
boarding passengers and other activities. This has undoubtedly made air travel safer. However,
the additional screening procedures cause longer delays in passenger boarding which translates
into higher costs for the traveler.

So, safety and security have benefits and costs to both transportation providers and users. The
trade-off is balancing the costs with the increase in safety and security.

Case Questions

Case 3-1: Who Pays the Price?

1. In each of the three scenarios presented in the case, opponents and proponents have divergent
views of government regulations. One view is on the public benefit, the other is on the cost to
private industry. How can you decide which view to accept?

There is no one correct answer to this question. The student should cite the National
Transportation Policy and its requirement that the government provide for safe transportation.
The answer should also include an examination of the trade-offs between the costs of government
regulation versus the benefit to society. Since these costs are passed on to private industry and
ultimately passed on to the consumer, society decides whether or not the benefit exceeds the
costs.

2. In each of the scenarios above, identify the benefits versus the costs for both viewpoints.

DHS – the obvious benefit is safer travel of airline passengers; the cost is the increased delays and
restrictions on what can be carried onto the airplane.
EPA - the benefit is less pollutants entering the atmosphere; the cost is the increased cost of the
engine and increased operating costs.
Customs – the benefit is reducing the probability of a terrorist attack; the cost is the added delay
for delivery of the container and the cost of labor to unload and reload.

3. Should the government intervene in setting regulations to increase security and help the
environment? Or should private industry take on this role?

The student should present the pros and cons of government regulation versus private initiatives.
However, since these initiatives add costs to industry, businesses might be hesitant to implement
such measures. Thus, it makes sense for the government to mandate safety and security measures
based on the direction it gets from the National Transportation Policy.
Case 3-2: Federal Highway Infrastructure Funding

1. Which of the three approaches makes the best economic sense? Which one makes the
best political sense?

There is no correct answer to this question so it is up to the student to make the arguments as to
which are best. Regardless of their choice, the cost of driving will increase to those who buy fuel
and use the highway system. From an economic perspective, costs will rise in all three options.
Since it will be a user tax, only those using the highway system will be affected. So, none of the
three options will have high negative political consequences.

2. What are the pros and cons of each approach? Be sure to include in your discussion the
views of personal vehicles versus commercial vehicles.

Gradual increase: pros – spreads the increases over a longer period of time; cons – might not be
able to fully fund the Trust Fund as quickly as it needs to be.
Indexing: pros – will allow the tax to go down in deflationary times; cons – might not have any
correlation to miles driven and/or fuel consumed.
Tolling: pros – easier to implement than the first two options; cons – which roads to toll and who
gets the money (state versus federal)?

The impact of the first two options is basically the same for both personal and commercial
vehicles since they both increase fuel costs regardless of route taken. Tolling has a different
impact since it is not related to fuel consumption but to route selection. Personal vehicles are less
likely to avoid a tolled highway in favor of a non-tolled highway if it adds time and/or distance.
However, since tolls on multiple axle vehicles increase as the number of axels, or weight, of the
vehicle increases, commercial drivers are more prone to use alternative highways (non-tolled) to
avoid the increased expense. The impact of this decision is especially high when the alternative
route is a secondary, or state, route that is not designed for larger vehicles. This can cause
congestion and possibly increase the accident rates on these secondary routes.

3. Is there another alternative not yet introduced? What would it be and how would it be
implemented?

This is up to the imagination of the student. However, one hybrid alternative would be the make
the fuel tax a percent of the price of fuel. This could be implemented immediately and, unlike the
indexing option, is directly related to the use of/ demand for fuel.

Suggested Internet project

Have the student log on to the Internet and search for safety regulations relating to motor
carriers, airlines, or railroads. They should explain how the rules affect the operation of a carrier.
An alternative project would be to log on to the home page for the Surface Transportation Board
and review any policy statements in light of the text discussion. The student might also review the
STB website for updates on new economic regulations that could affect the railroad industry.
Review the information found on the homepage of the Department of Homeland Security. Take
two or more items and discuss in light of the chapter. The student should also review one of the
agencies with the DHS.

Some addresses are:

Department of Homeland Security http://www.dhs.gov

Department of Transportation http://www.dot.gov

Code of Federal Regulations on GPO Access

http://www.access.gpo.gov/nara/cfr/cfrtablesearch.html

Federal Motor Carrier Safety Administration Home Page http://www.fmcsa.dot.gov

Federal Railroad Administration http://www.fra.dot.gov/site/index.htm

Hazardous Management Information System http://www.dlis.dla.mil/hmis.htm

National Highway Traffic Safety Administration http://www.nhtsa.dot.gov/toc.html

Office of Highway Policy Information Home Page http://www.fhwa.dot.gov/ohim

Surface Transportation Board http://www.stb.dot.gov/