SIMPLE ANALYTICS OF RAIL COSTS AND DISINVESTMENT CRITERIA

Recent estimates have indicated that a significant amount of excess capacity exists in the rail freight industry. The techniques used to estimate branch-line viability have varied widely, however, and in many cases there is no economic basis for the viability analysis. This paper develops the microeconomic concept of plant indivisibilities and demonstrates the effects of minimum efficient scale on the costs of providing branch-line service. Using this characterization of rail costs, it is shown that the demand curve can lie entirely beneath the declining average cost curve, making it impossible for total revenue to equal total cost with a single price. The concepts of consumer and producer surplus are introduced, and a social welfare criterion of optimum disinvestment is developed. That criterion is compared to the private profitability criterion. The two are shown to be equivalent with perfect price discrimination and to depend implicitly on the pricing of alternative modes, as illustrated by a model including both rail and motor freight service. Certain simplifying conditions are then relaxed in order to take account of rail network interdependencies: parallel rail lines and the "feeder effect" or the movement of branch-line originations over the main-line network. No empirical estimate of rail costs or demand is included. Rather, the paper develops heuristic models of branch-line disinvestment that may serve to inform empirical investigations.

Media Info

  • Media Type: Print
  • Features: Figures; References;
  • Pagination: pp 19-25
  • Monograph Title: Surface transport regulation and railroad planning
  • Serial:

Subject/Index Terms

Filing Info

  • Accession Number: 00196873
  • Record Type: Publication
  • ISBN: 0309028329
  • Files: TRIS, TRB
  • Created Date: Aug 28 1979 12:00AM