21 April, 2008

Sexy Train Blogging

Ryan Avent points us to a Washington Post story on the booming freight train industry. Despite the fact that other forms of shipping (i.e. trucks) are subsidized in all kinds of ways (underpriced gas, mostly free roads) freight trains are doing quite well. It sounds like they're also earning monopoly profits on many routes because one company owns all of the track.

Rail is economically very similar to roads. The first important characteristic of each is that they are natural monopolies. Roads in cities simply can't be duplicated. There can only be one road that goes to each house or building. Highways between cities can be duplicated, but would it really be profitable for a company to build a highway right next to one built by another company? No, the start-up costs are too high compared to the price that could be charged in a competitive market. The resulting lack of competition is a justification for government provision of both roads and rail.

The second salient aspect is that there are congestion problems. Neither is a perfectly rival good. An orange is rival: if I eat it, you can't. But you can still use the road even if I do as well. However, each additional person makes the road slightly less useful because traffic slows down by a tiny bit (that adds up to traffic jams and 20mph rush hours). Users of this service should be charged for the inconvenience they cause everyone else.

So, for both roads and rail, I think public ownership of the infrastructure itself makes a lot of sense if it is accompanied by congestion and maintenance charges. For roads, we have public infrastructure, but use charges are not very widespread (outside of tollways and turnpikes). Unfortunately, New York's plan to charge people for driving in Manhattan was defeated. In rail, on the other hand, there is private ownership of infrastructure that leads to monopolization of routes. Maybe some sort of public buyout of railways is in order. (Does this analysis also apply to communications infrastructure?)

No comments: