The Corps has the responsibility for  construction, operation, and maintenance of the nation’s waterway  system. Highway infrastructure. More specifically, economic efficiency requires  that the price of a good or service equals the marginal social cost (the cost  to society of consuming one additional unit of the good or service). Competitive market forces  should lead service providers to pass the cost of these payments on to  their customers in the same manner that private costs are passed on. When Prices Do Not Reflect All Marginal Costs, Competition Can Be Distorted and Economic Efficiency Reduced

The hypothetical scenarios in figure 2 illustrate how discrepancies  between marginal social costs (plus a competitive return on investment)  and prices, whether caused by government subsidies or by external costs,  can distort competition and cause inefficient allocations of resources in  the freight transportation sector. There Can Be a Tradeoff between Recovering Fixed Public Infrastructure Costs and Promoting the Efficient Use of Existing Infrastructure

Certain freight transportation costs, such as the construction of new  infrastructure, are considered to be “fixed” (rather than marginal) in the  sense that they do not increase as use of the infrastructure increases. Specifically, we estimate that freight trucking costs that were  not passed on to customers were at least 6 times greater than rail costs  and at least 9 times greater than waterways costs per million ton miles of  freight transport. Most of these costs were external costs imposed on  society. Consumers of Freight Services Pay Less of the Marginal Costs Associated with Trucking than with Railroads or Waterways

Although certain data limitations and difficulties in valuing important  categories of costs prevent us from making definitive quantitative  estimates of the nonprivate (i.e., public and external) marginal costs  generated by an additional million ton-miles of freight service provided by  each of the three transportation modes, we are able to present at least  lower bound estimates of those costs and to compare the magnitudes of  these costs across the three modes. In a competitive economy, private  costs such as payments for labor and fuel are generally passed on in prices  to the final consumers of freight services; therefore, those costs did not  need to be included in our estimation of costs that are not passed on. In addition to  mode-shifting, price changes can prompt other economic responses in the  short run, such as the use of lighter-weight materials; over the longer term  there is greater potential for responses that will shape the overall  distribution and use of freight services. Costs can vary widely based on the specific characteristics of an individual  shipment, such as the geography and population density of the shipment’s  route, and the fuel-efficiency of the specific vehicle carrying it. Ideally,  policy that is able to align marginal prices with marginal costs on a  shipment-by-shipment basis would provide the greatest economic benefit. However, achieving this in practice would typically result in high  administrative costs. Less targeted interventions (e.g., charging fees or taxes based on average  costs, subsidizing more efficient alternatives, or broadly applying safety or  emission regulations) can have impacts on users and potentially change  the overall distribution of freight across modes or demand for freight  overall, but provide fewer benefits. Other complexities arise when attempting to align fixed costs and  revenues. Agency Comments

We provided copies of a draft of this report to DOT and the Corps for  review and comment. DOT also provided technical  corrections, which we incorporated in the report. Appendix I: Objectives, Scope, and Methodology

The objectives of this report are to (1) describe how public policies can  affect competition and efficiency within the surface freight transportation  sector; (2) determine what is known about the extent to which costs are  borne by surface freight users; and (3) discuss how our findings could be  used when making future surface freight transportation policy. Freight trucks.
Why GAO Did This Study

Road, rail, and waterway freight transportation is vital to the nation's economy. Government tax, regulatory, and infrastructure investment policies can affect the costs that shippers pass on to their customers. If government policy gives one mode a cost advantage over another, by, for example, not recouping all the costs of that mode's use of infrastructure, then shipping prices and customers' use of freight modes can be distorted, reducing the overall efficiency of the nation's economy. As requested, this report (1) describes how government policies can affect competition and efficiency within the surface freight transportation sector, (2) determines what is known about the extent to which all costs are borne by surface freight customers, and (3) discusses the use of the findings when making future surface freight transportation policy. GAO reviewed the transportation literature and analyzed financial and technical data from the Department of Transportation (DOT), the Army Corps of Engineers (Corps), and the Environmental Protection Agency to make cross-modal comparisons at a national level. Data limitations and assumptions inherent in an aggregate national comparison are noted in the report.

What GAO Found

Public spending, tax, and regulatory policies can promote economic efficiency in the freight transportation sector when they result in prices that reflect all marginal costs (the cost to society of one additional unit of service). These costs include private costs; public costs, such as infrastructure maintenance; and external costs, such as congestion, pollution, and accidents. When prices do not reflect all these costs, one mode may have a cost advantage over the others that distorts competition. As a consequence, the nation could devote more resources than needed to higher cost freight modes, an inefficient outcome that lowers economic well-being. Inefficient public investment decisions can result when all construction and other fixed costs are not passed on to the beneficiaries of that investment. GAO's analysis shows that on average, additional freight service provided by trucks generated significantly more costs that are not passed on to consumers of that service than the same amount of freight service provided by either rail or water. GAO estimates that freight trucking costs that were not passed on to consumers were at least 6 times greater than rail costs and at least 9 times greater than waterways costs per million ton miles of freight transport. Most of these costs were external costs imposed on society. Marginal public infrastructure costs were significant only for trucking. Given limitations in the highway, rail, and waterway economic, financial, technical, and environmental data available for the analysis, GAO presents conservative estimates. While freight costs are not fully passed on to consumers across all modes, a number of issues are important for decision makers to consider when proposing policy changes to align prices with marginal costs or reduce the difference between government fixed costs and revenues. Costs can vary widely based on the specific characteristics of an individual shipment, such as the geography and population density of the shipment's route, and the fuel-efficiency of the specific vehicle carrying it. Policy changes that align prices with marginal costs on a shipment-by-shipment basis would provide the greatest economic benefit, but precisely targeted policy changes can result in high administrative costs. By contrast, less targeted changes--such as charging user fees based on average costs, subsidizing more efficient alternatives, or broadly applying safety or emissions regulations--can change the overall distribution of freight across modes, but may provide fewer benefits. Although the current configuration of transportation infrastructure can limit the shifting of freight among modes, price changes can prompt other economic responses. Over the longer term, there is greater potential for responses that will shape the overall distribution and use of freight services.

What GAO Recommends

GAO is not making recommendations in this report. GAO provided a draft of this report to DOT and the Corps. DOT provided technical suggestions and corrections, which were incorporated as appropriate. The Corps had no comments.