4.2 - Demand estimates

Definition

A demand estimate is a prediction of the future use of a transport facility, service or mode. Use can be influenced by the user charges, the attractiveness to users, and the availability and quality of alternative routes, services or modes.

Calculating the potential demand for a new or improved service or facility will generally be based on willingness-to-pay (WTP) values (derived from a stated preference survey) combined with data on current users, and existing and proposed user charges.

In some cases, it will be possible to calculate the demand based on international or New Zealand experience, including use of validated models.

Elasticity and cross-elasticity

Economists measure changes in consumption (use) using elasticities defined as the percentage change in consumption of a 'good' caused by a one-percent change in its price or other characteristic (such as traffic speed or comfort).

For example, an elasticity of −0.5 for vehicle use with respect to vehicle operating costs means that each one percent increase in these costs results in a 0.5 percent reduction in vehicle distance or trips. Similarly, public transport elasticity is defined as the percentage change in patronage resulting from each one percent change in transport service, such as bus kilometres or frequency. A negative sign indicates that the effect operates in the opposite direction from the cause (eg an increase in price causes a reduction in travel).

Cross-elasticities refer to the percentage change in the consumption of a good resulting from a price change in another, related good. For example, an increase in the cost of driving tends to reduce demand for parking and increase demand for public transport travel.

Transport elasticities tend to increase over time as consumers have more opportunities to take prices into account when making long-term decisions. For example, if consumers anticipate low private vehicle use prices they are more likely to choose a private vehicle dependent suburban home, but if they anticipate significant increases in driving costs they might place a greater premium on having alternatives, such as access to public transport and shops within convenient walking distance. These long-term decisions, in turn, affect the options that are available. It may take many years for the full effect of a price change to be felt. Long-run travel demand elasticities are typically two to three times short-run elasticities.

Appendix A13 provides some elasticity and cross elasticity values that may be used for freight or passenger transport services. Reference 1 provides a database of values for a wide range of situations.

Nature of demand

The demand for a new or improved service or facility depends on several factors:

• current or 'base' average user charge
• the nature of the change in service
• the 'willingness-to-pay' of existing users for the service change
• the responsiveness of demand to changes in user charges (the user charge elasticity) or another journey attribute (eg in-vehicle or walking time).

Factors affecting price elasticities

The following factors can affect how much a change in prices impacts travel activity.

• Type of price change. Vehicle purchase and registration fees can affect the number and type of vehicles purchased. Fuel prices and emission fees affect the type of vehicle used. A road toll may shift some trips to other routes and destinations. Congestion pricing may shift travel times as well as changing mode and the total number of trips that occur. Residential parking fees are likely to affect vehicle ownership. A time-variable parking fee can affect when trips occur.
• Type of trip and traveller. Commute trips tend to be less sensitive than shopping or recreational trips. Weekday trips may have very different elasticities than weekend trips. Urban peak-period trips tend to be price insensitive because congestion discourages lower-value trips. Travellers with higher incomes tend to be less price sensitive than lower income travellers. Business travellers tend to be less price sensitive than those travelling for personal activities.
• Quality and price of alternative routes, modes and destinations. Price sensitivity tends to increase if alternative routes, modes and destinations are good quality and affordable.
• Scale and scope of pricing, in general narrowly defined transport (eg peak period car travel on a particular road) is more sensitive than more broadly defined transport (eg total personal travel), because consumers have more alternatives in the narrowly defined case.

Modal share

The mode share is a function of the difference in generalised costs between the modes. The relationship can be used in reverse to determine the change in generalised cost difference that is required to achieve an observed change in mode share.

Because mode share relationships are calibrated to actual behaviour, the generalised cost difference can be equated to the perceived benefit associated with a given change in mode share. Strategic transportation planning models contain such mode share relationships.

Stated preference surveys

Evaluators may wish to consult other sources for guidance as to the design and implementation of stated preference surveys to derive WTP values. Land Transport NZ may be able to provide some assistance in this regard.

Rules

Demand estimates must be completed for all TDM economic evaluations.

Proposals for new transport services or for major improvements to an existing service, and any proposals entailing a subsidy or price change, may require a specially commissioned study to assess WTP and elasticity of demand.

For small alterations to existing services or where the required amount of financial assistance is small, the demand estimates may be produced using WTP values drawn from other comparable services.