Transportation and telecommunications costs

Abstract

The decreasing costs of telecommunications and the often increasing costs of transportation have given rise to claims that information-intensive activities are becoming footloose. One of the assumptions underlying these claims is that the cost of distance in telecommunications is negligible or very low. This paper examines the relationship between distance and interaction (telecommunications and transportation) costs and rates, with particular emphasis on the effects of geographical scale. Focusing on data from Israel, it demonstrates that the costs of distance are persistent even in telecommunications systems; that for short distances or small regions, transportation costs are not necessarily higher than telecommunications costs; and that pricing of telecommunications services by governments (or PTT's) often does not reflect the costs of providing the services. This creates a cost distribution which differs from Euclidean geographical distances: discontinuities in the rate structure of telecommunications distort the distance-cost schedules and, by creating barriers, may affect location decisions.

The paper also demonstrates that actual interaction costs are context specific and therefore no general model has been formulated. Instead, an accounting procedure, which can be used by decision-makers considering (re)location in specific contexts, is suggested.