Sunday, 26 October 2014

Railway links: or how does one solve the problem of monopoly in infrastructure?

Here is a map showing the service of Amtrak train company, America's government subsidized passenger railroad company.


The map depicts Amtrak's stations across the US, where the size of the circle corresponds to the number of passengers circulating on the given station. This was taken from a summer blog at the Economist (they got it from here) where they questioned the justifiably of some of Amtrak's regular lines across the country when almost a third of their passengers use the service across only three cities (New York, Washington and Philadelphia). 

The Economist concludes:
"...Amtrak's long-haul routes (you can see them on the map as the tiny blue dots stretching across most of the country) are money pits. But America's bizarre constitutional structure, which gives outsized influence to states with small populations, creates an incentive for Amtrak to maintain unprofitable services that keep influential senators happy. 
If its long-haul trains were cancelled, Amtrak would serve just 23 states, down from the current 46. That would make it more profitable, allowing it to improve services in areas where it actually has riders—Mr Hicks suggests increasing train frequency between major midwestern cities. But an Amtrak that served just 23 states would likely be politically unsustainable—and that's exactly the problem."
This is the classical problem with any state-owned service that offers some sort of a public good. The public post service faces the same issue - because they have to offer the service even in the remote parts of the country they face high loses in such areas. A publicly owned train company is similar. Amtrak has to travel across all these routes to perform its public good function, in addition to making a few senators and congressmen happy. If it were to close down some of its unprofitable routes it would perhaps eliminate the need for such high government subsidies, but it would cause distress to local residents where the train lines have been cancelled. In economic terms the issue is pure cost-benefit, where the benefits for the many (lower subsidies and hence lower public spending, or perhaps better targeted public spending) outweigh the costs for the few. 

But politics doesn't work this way unfortunately. Very often for precisely such local issues the benefits to the few outweigh the costs for the many. That's essentially the reason why in many countries small, well organized groups, usually of a local origin, get what they want from the state budget, even though such decisions usually come at a high cost for the taxpayers. They successfully solve the collective action problem, whereas the taxpayers as a dispersed group cannot do anything about it. This is in fact one of the biggest problematic features of democracy, that needs to be solved on a constitutional level.

But I digress. The point was that in many countries large public sector companies are maintained (and by that I mean heavily subsidized) because they offer a unique service even to those areas and customers to which the 'market' wouldn't  offer the same service, or would offer it at a very high price. This is an example of the classical market failure argument

However the argument doesn't make a compelling case that by closing some of the inefficient routes there would be no market participant to provide the alternative. The costs are high, sure, however on a local level if the demand for some means of transportation is high, there will be a subsequent supply. Some entrepreneur will design a way to surpass the lack of supply and offer an alternative. Perhaps the trains across country are unpopular due to the length of travel which is why the people choose planes instead? Perhaps the primary mode of transportation in local areas are cars and buses? Perhaps the demand for taking the train in some areas is low, so the supply must simply adjust. If this means no more train services in a certain areas, this is purely the decision of the customers. The customers probably don't take trains because other modes of transportation are better and more efficient. If the company doesn't adjust to the needs of the consumers, it fails, or in a publicly-owned company scenario, it gets heavy subsidies. 

Another factor we should control for is the role of technology. Why aren't Amtrak's trains super-fast Maglev trains like in Japan? If they were, if it were possible to get from New York to LA in 8 and a half hours (2700 miles for a train traveling at 320 mph) instead of 2 and a half days, then perhaps many would take this opportunity. There is talk of magnetic technology that can make transportation even more efficient and even faster. If this ever becomes true than this type of a technological breakthrough in the railway system would be a huge disruptive technology for the airline industry. And then the airline companies will have to be subsidized as the less efficient mode of transportation.

Returning back to the initial question from the title, governments should provide only the basic, essential public goods such as the proper justice system, private property protection, enforcement of contracts, and the basic infrastructure, all of which equally benefit everyone. The basic infrastructure does not imply having large, inefficient public companies being granted a monopoly on a certain service (btw monopolies should never be classified as market failures since it is the government that offers a licence for a company to be a monopoly). It implies that the government builds the roads and railways for the market participants to take advantage of. Literary and figuratively speaking. It is up to the entrepreneurs to seize the opportunity and satisfy the specific demand for a certain service. Heavily subsidizing public companies for inefficient services is never the solution. In terms of technology (building super fast Maglev trains), because its early implementation can bring about extremely high costs (just like the initial railways and roads had enormous costs), this too can be justified as a necessary, basic public good that brings an equal benefit to all the citizens, not just the selected few. 

2 comments:

  1. Clearly you have pushing for some personal agenda, or haven't actually taken the time to research the issue in depth.

    If you want to solve the issue that is "government subsidies" you have to start with highways. In 2014 alone there has been an estimated 50 billion dollars transferred from the US general fund, and state general fund to the US highway fund which is bankrupt, amounting to $150 per person in the US for 2014 alone.

    This is with fuel taxes averaging 50 cents per gallon of gasoline, and 55 cents on diesel across federal and state taxes, earning an estimated $50 billion this year. And even with $100 billion (50 billion subsidized) we have a Rank D road infrastructure with 25% of the bridges in obsolete or derelict condition which is why we have had to spend another $500 billion (2009 stimulus) from federal stimulus on "Shovel ready projects" on the highway infrastructure. All told the subsidies to the highway system amount to more then $150 billion per year for the last 4 years.

    If the highway system was to be properly funded without subsidies, fuel taxes would need to raise another 60 cents each just to cover the current transfers from the general funds, and another $1 on top of that for the stimulus packages from Bush and Obama over the last decade, for a total increase of $1.6 per gallon of Gasoline and diesel.

    Then you wouldn't need to subsidize Amtrak, or subsidize mass transit systems or even fuel efficient cars because that would already be priced in. But as it is now we have to subsidize EVERYTHING including the mass transit systems and airports. Even the Freight railroads are subsidized as the fuel taxes on diesel is removed for all freight companies, removing 55 cents per gallon.

    But your article is just another agenda pusher as so many republicans/ "economist" do and hide the true problems in society.

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    Replies
    1. Personal agenda? What on? You've missed the point of the article, or haven't even read it.

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