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As has been indicated in earlier studies on this subject, and verified again by our special study in Europe, it requires toll increases of some magnitude to effect any changes in the volume of traffic through the Panama Canal. This is true, apparently, even for movements that can be regarded as very sensitive to toll increases.

The economic reason for this threshold phenomenon is simply that the operation of a shipping company is (a) a very complex and interrelated process and (b) involves a multitude of individual costs and constant cost changes.

The first factor of complexity tends to incline the ship operator to freeze his procedure-including routing of ships-until some event of consequence occurs. And the notion of an "event of consequence" involves a price increase of some magnitude.

This tendency toward rigidity is further reinforced by the multiplicity of constantly changing costs that are involved in the operation of a shipping company. Many of these individual cost changes could, if sufficiently large, prompt changes in a company's method and pattern of operation. By the same token, however, small cost changes are ignored on the theory that the true cost of making a substantial rearrangement in the operating pattern of the company might be greater than the cost increase which it is designed to offset.

The validity of this hypothesis was confirmed in our field investigations during the summer of 1973. Four European shipping companies were interviewed, and in all cases it was established that the movements were quite sensitive to all increases. In addition, one of the companies involved was quite outspoken in criticism about the quality of the service offered at the Canal. Points of criticism included (1) no night transits, (2) working to rule, (3) draft restrictions, (4) delays, and (5) pilots' reluctance to work large ships.

Yet in spite of this, it was established in all cases that toll increases of 15% or less would not cause any diversions of ships away from the Panama Canal. However, indications were that for Far East-Europe movements, a 15% increase would be close to the threshold value.

Different commodity movements will have different threshold values and an attempt is made below to indicate these thresholds for all commodities which are sensitive to toll increases of 25% or less:

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It should be noted that, given the very high current level of ship charter rates, a toll increase of perhaps 20% instituted in the near future might have little immediate effect. But given the tendency toward a stronger long-term effect, it is likely that with the decline of freight rates the effect of the increases would spread to most, if not all, of the above commodity groups.

On the second point to be determined, the probable slope of the response curve, there is little empirical data that can be cited. However, theoretical analysis indicates that straight line interpolation between the initial values given above and values shown in the attached tables 1 and 2 might be the simplest and most accurate method. The reasoning is as follows:

Once the effective tolls for a specific commodity movement have entered a currently sensitive range, one can assume that individual decision makers will begin to take the new price into account and, at least, consider the possibility of changes. One can further assume that within this sensitive range each voyage constitutes a potential decision and the probability of decisions involving an alternate route will increase with increase in tolls. Since the number of such individual decisions over time will undoubtedly be quite large, a linear and smooth interpolation between the known points suggest itself as the most logical answer.

TABLE I-PANAMA CANAL COMMERCIAL CARGO TONNAGE

[Summary of estimated effects of toll rate increase: 1975-78-(thousands of long tons), revised as of December 1973]

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79 are interpolated. Slight discrepancies due to rounding. Note.--Projections for no change in toll rates are from Economics Research Associates, "Panama Canal Forecast System Output Report', run of Nov. 24, 1973 for 1975, 1976, 1980, 1985. Figures for 1977

TABLE la-PANAMA CANAL COMMERCIAL CARGO TONNAGE

[Summary of Estimated Effects of Toll Rate Increase: 1979-85-(thousands of long tons), revised as of December 1973]

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TABLE 2-PANAMA CANAL TOLL COLLECTIONS ASSOCIATED WITH COMMERCIAL CARGO

[Summary of Estimated Effects of Toll Rate Increases: 1975-78-(thousands of dollars), Revised as of December 1973]

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79-367 77-21

TABLE 2a-PANAMA CANAL TOLL COLLECTIONS ASSOCIATED WITH COMMERCIAL CARGO

[Summary of Estimated Effects of Toll Rate Increases: 1979-85 (thousands of dollars) Revised as of 1973]

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