Railroad Rates, Profitability, and Welfare Under Deregulation

Efforts to reform regulation of the railroad industry are supported by a substantial body of economic research which has described and measured the cost of the present regulatory regime. In focusing on the defects of the status quo, economists have neglected to give sufficient attention to analyzing in detail the likely consequences of alternative regulatory policies, including deregulation. This paper draws on available estimates of the structure of rail demand and technology in an attempt to predict the impact of rate flexibility at rail prices, profitability, and economic welfare. The effects of deregulation are simulated under a variety of alternative assumptions concerning the elasticity of demand for rail services, the degree of interrailroad competition, the presence or absence of truck deregulation, and the magnitude of rail cost reduction attainable with enhanced commercial freedom. The principal object of this exercise is to ascertain whether rate deregulation is likely to restore the rail industry to financial viability by generating a cash flow sufficient to maintain adequately and improve the physical plant and to provide high quality rail service. A corollary aim is to determine whether present or potential railroad market power is sufficiently great to generate excessive increase in profits, prices, and associated static dead-weight losses.