4.3 Direct wage and price effects in LINE
As described above, wages and prices will change as transport costs change. There are two
direct effects, one which is truly direct, and one which arises through creation or reinforcement
of externalities which in turn has an impact on prices. In figure 5 the two types of direct effect
on wages and prices are shown. The true direct effect is shown by ellipses with dark shading,
whilst the effects which operate through externalities are shown by ellipses with lighter shading.
The first effect enters directly into the price circle as an addition to costs and prices: In figure 5
an increase in commuting costs implies that disposable income is reduced directly. In addition,
commodity prices increase due to changes in transport costs for regional and interregional trade
and also for changes in transport costs for shopping and tourism. The second effect works
through externalities, both technological and pecuniary, which influence equilibrium wages and
prices. In figure 5 a change in transport costs changes the size of the labour market and thereby
the equilibrium wage. Changes in wages lead to changes in prices of production and in prices of
commodities, following the logic of the cost-price circle. A change in transport costs will also
affect the level of urban externalities and thereby wages and prices. This in turn changes the
prices of commodities following the logic of the cost-price circle.
It should be noted that this discussion and illustration of the effect of externalities is
limited to the consequences of changes in transport costs for wages, as shown in figure 5.
Similar effects could be illustrated in relation to the commodity market.
The indirect and induced effects of wage and price changes depend in the medium term on
exchange rate regimes. If the economy is based upon fixed exchange rates, it matters whether
or not a change in real wages leads to changes in nominal wages or changes in prices or a
combination of these two. If wages change, assuming sticky prices, then competitiveness of
domestic production is unchanged and the wage change will only have a minor impact on
economic activity. On the other hand, if prices change, assuming sticky wages, then
competitiveness of domestic production and international export and import will react with
corresponding more substantial effects on economic activity.
If the economy is based upon floating exchange rates, then changes in competitiveness due
to changing prices will be more moderate as price changes will tend to be neutralised by
exchange rate fluctuations.
5. Modelling the redistribution of the relative productivity decline associated with road
pricing - the case of Denmark
The main aim of this part of the analysis is to examine the consequences of including
externalities in an analysis of the effects of a change in transport costs on regional economic
activity. To demonstrate these effects, the hypothetical case of the introduction of road pricing
in Denmark is examined. First, the road pricing scheme is presented, followed by a
description of the way in which transport costs are affected. Second, the effects without
externalities are presented, followed by an examination of the impacts of including externality
effects in the analysis. Finally, the total effects, divided into direct price effects and
externality effects are estimated.
5.1 Road pricing and changes in transport costs
The design of road pricing systems relates to general issues concerning transport policy and
technical constraints and possibilities, in concrete institutional and cultural contexts. Road
pricing systems are discussed in Jensen-Butler et al. (2005) and Madsen et al (2005). In this
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