Description and Challenges of the London Bus System Essay
Institute for Transport Studies, University of Leeds, LS2 9JT, UK
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Since the introduction of bus service tendering in London in the mid 1980s, there has been, according to London Transport Buses (1999), “a dramatic improvement” in both the quality of bus services provided and the value for money achieved. However, the rules of the game have changed considerably over time. Whereas in the first instance a gross cost regime was used to let just a part of the network to public sector operators, in recent years the whole of the network has been let in …show more content…
Market failure in the bus industry
For the purposes of this paper, we subscribe to the public interest theory of regulation: that is, it is the potential for market failure which We will examine four sources of market failure, viz: the existence of natural monopoly; the nature of the product; the working of the market; and second-best considerations. We consider each in turn.
An industry is a natural monopoly if one firm can supply more efficiently than two or more firms. For an industry producing a single, homogeneous product, this boils down to the existence of economies of scale being sufficient (but not necessary) for a natural monopoly to exist. In such a case, it is desirable that only one firm be present in the market. Where the industry produces multiple, differentiated products, the existence of scale economies is neither necessary nor sufficient for natural monopoly. In this case, we need to consider whether it is more efficient for a given firm to produce many of the products or few of the products. In the former case, there are economies of scope.
The general view is that there are no significant economies of scale to firm size in the bus industry, although there have recently been suggestions that the “supergroups” which have developed during the 1990s may be able to achieve some absolute cost advantages in aspects such as finance for vehicle