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Restructuring regulation of the rail industry for the public interest


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  • Kessides, Ioannis N.
  • Willig, Robert D.


Throughout the world, the rail industry historically has been one of the most extensively regulated of all sectors. Price, entry, exit, financial structure, accounting methods, vertical relations, and operating rules have all been subject to some form of government control. The public utility paradigm of government regulation has been applied on the assumption that the economic characteristics of the rail industry preclude competitive organization or the need for market responsiveness. In the past three decades, however, policymakers and economists have become increasingly critical of traditional regulation of the rail industry. It is generally accepted that in markets where rail carriers seek to meet demand, there is often effective competition, and that government restrictions on the structure and conduct of firms in this industry impose considerable costs on society. Misguided regulatory policies have been blamed for the misallocation of freight traffic among competing modes of transport, excess capacity, excessive operating costs, and poor investment decisions. Regulatory controls have also shouldered much of the blame for the poor financial condition of railroads, the deterioration of rail plant, the suppression and delay of cost-reducing innovations, and the mediocre quality of rail service. The authors suggest principles for restructuring railroad regulation - indeed, for restructuring the orientation of railroad entries - for the sake of public interest. Much can be learned, they contend, from applying the principles of industrial organization to analysis of the rail industry. To assess the implications of policies aimed at rate regulation or infrastructure, it is essential to understand the nature of technology, costs, and demand in the rail industry. Government's role in relation to market behavior should be based explicitly on the economic and technological realities of the railroad marketplace. The authors say that restructuring along the lines they suggest - putting more emphasis on marketing effectiveness - will result in a more profitable railway with a better chance of covering its costs for commercial services. Changing the basis for noncommercial services as they suggest will make those services more effective at fulfilling public policy objectives, will eliminate an insuperable drain on revenues that condemns rails to inadequate investment, and will eliminate cross-subsidies that make it difficult for rails to compete against other modes of transport.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1506.

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Date of creation: 30 Sep 1995
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Handle: RePEc:wbk:wbrwps:1506

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Keywords: Markets and Market Access; Economic Theory&Research; Environmental Economics&Policies; Decentralization; Enterprise Development&Reform; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Markets and Market Access; Access to Markets;


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  1. Richard C. Levin, 1978. "Allocation in Surface Freight Transportation: Does Rate Regulation Matter?," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 18-45, Spring.
  2. Ronald R. Braeutigam, 1984. "Socially Optimal Pricing with Rivalry and Economies of Scale," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 127-134, Spring.
  3. Richard C. Levin, 1981. "Railroad Rates, Profitability, and Welfare Under Deregulation," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 1-26, Spring.
  4. Moyer, Neil E. & Thompson, Louis S., 1992. "Options for reshaping the railway," Policy Research Working Paper Series 926, The World Bank.
  5. Baumol, William J & Willig, Robert D, 1981. "Fixed Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 96(3), pages 405-31, August.
  6. Bailey, Elizabeth E, 1981. "Contestability and the Design of Regulatory and Antitrust Policy," American Economic Review, American Economic Association, vol. 71(2), pages 178-83, May.
  7. Friedlaender, Ann F, 1971. "The Social Costs of Regulating the Railroads," American Economic Review, American Economic Association, vol. 61(2), pages 226-34, May.
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Cited by:
  1. Christian Desmaris, 2013. "The reform of passenger rail in Switzerland: more performance without competition," Post-Print halshs-00860911, HAL.
  2. Kennedy, David, 1997. "Regulating access to the railway network," Utilities Policy, Elsevier, vol. 6(1), pages 57-65, March.
  3. Escola de Economia da Fundação Getulio Vargas, 2001. "Private Participation in Infrastructure Projects and Determinants of Observed Contractual Arrangements: The Case of Brazil," Research Department Publications 3112, Inter-American Development Bank, Research Department.
  4. Christian Desmaris, 2011. "La gouvernance régionale du transport ferroviaire de voyageur en France : une approche par la méthode des comptes de surplus," Post-Print halshs-00582461, HAL.
  5. Johansson, Per & Nilsson, Jan-Eric, 2004. "An economic analysis of track maintenance costs," Transport Policy, Elsevier, vol. 11(3), pages 277-286, July.
  6. van Vuuren, Daniel, 2002. "Optimal pricing in railway passenger transport: theory and practice in The Netherlands," Transport Policy, Elsevier, vol. 9(2), pages 95-106, April.
  7. Cesaltina Pacheco Pires & Margarida Catalão-Lopes, 2012. "Scope economies, entry deterrence and welfare," CEFAGE-UE Working Papers 2012_11, University of Evora, CEFAGE-UE (Portugal).
  8. Gerhard Munduch & Alexander Pfister & Leopold Sögner & Alfred Stiassny, 2002. "Estimating Marginal Costs for the Austrian Railway System," Department of Economics Working Papers wuwp078, Vienna University of Economics, Department of Economics.
  9. Cantos, Pedro & Campos, Javier, 2005. "Recent changes in the global rail industry: evaluating the new regulatory instruments," European Transport \ Trasporti Europei, ISTIEE, Institute for the Study of Transport within the European Economic Integration, issue 29, pages 22-45.


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