Iceberg transportation costs

In economic models, iceberg transport costs serve as a simplified representation of transport costs in the so-called Krugman model . It is assumed that only some of the agricultural or industrial goods arrive at their destination. Analogous to an iceberg, which would slowly melt during transport and thus lose part of its mass, part of the goods is lost and "disappears". In order for a certain amount of the good to arrive at the destination, the part that is lost along the way has to be produced in addition to this amount of the good. The further a good is transported, the greater the loss and the more expensive the transport.

The advantage of this simplification is that the mathematical formulation is simplified and costs can be specified directly in the units of the goods to be transported without having to include prices in the model.

The concept was coined by Paul Samuelson in an article from 1954, but also forms the basis of current economic models that include transport costs, such as in the New Economic Geography .

In some cases, there are real-life transportation costs that follow the iceberg model:

• A beverage manufacturer is supposed to deliver 500 pallets of juice to a distribution warehouse located abroad . The haulier receives 1/6 of the goods for his service. In this case, 100 extra pallets of juice have to be produced to meet the delivery requirements.

• Pumps on gas pipelines are often operated directly with gas that is taken from the pipeline itself. So more gas has to be fed into the pipeline than reaches the customer.

However, the transport costs are also in these cases economically usually separated from the detected value of the transported goods.

literature

• Samuelson, Paul A .: The Transfer Problem and Transport Costs, II: Analysis of Effects of Trade Impediments. The Economic Journal . Vol. 64, No. 254 (Jun., 1954), pp. 264-289
• Promann, Johannes: Transport costs of the new economic geography (2007) ISBN 978-3-638-05396-9 (overview)