Railways and Just Prices

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Railways and Just Prices

• Nick Wills-JohnsonPATREC
• PATREC Research Forum
• 19 September 2006

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Overview of Paper

• How much should a train ticket cost?
• Market doesnt work, but what does?
• Three ways of determining prices
• Technocratic approach - efficiency
• Public service approach - equity
• Judicial approach - fairness
• Now use technocracy and efficiency approach on
  assumption it will improve social welfare.
• Paper makes a qualified case for fairness
• 2 traditions of fairness relationship to
  economic efficiency.
• Just as you can go from efficiency to equity
  fairness, can go from fairness to equity
  efficiency.

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Prices by Technocracy

• Administrative approach
• Technical Efficiency
• Price based on cost model what is the minimum
  cost of service
• Australian regulators
• Allocative Efficiency
• Price based on value model which mode is best
  for service.
• ICC.
• Efficient prices are Pareto optimal -? welfare
  maximisation -?fairness equity.

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Public Service Prices

• Prices based on societal value equity
• Cost and price only loosely related.
• Broader than fairness prices right wrongs.
• Can be imposed on public or pvt railways.
• Legislation is the method of implementation.
• Makes big changes quickly.
• Great if you know the solution and the will of
  the people is clear.

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Judicial Prices

• Based on fairness
• Only consider two parties, no social viewpoint.
• Equal treatment and equidistant results.
• Implemented by a court or adjudicator
• Incremental approach.
• Useful when environment uncertain.
• Useful when parties equally powerful.

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What Does Fairness Mean? Just Price

• Zoroaster and contracting with the divine.
• Aristotle and commutative justice.
• Romans and Laesiu Enormis
• Scholastics and the just price.
• Ethical basis, supporting the social organism
• Market price, free of fraud and coercion.
• State had duty to set price if market imperfect
• But no support for all prices set by State
  (except Gerson).
• Monopolies and guilds bad (monopoly rent
  usury).
• Prince allowing a monopoly had to provide a just
  price.
• Link just price economic efficiency price

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What Does Fairness Mean? Game Theory

• Game theory gives mathematical precision to
  Scholastic conclusion.
• Game theory solution concepts Nash Equilibrium,
  balanced set, core, kernel, nucleolus value
• All fair in sense of optimal equilibrium.
• Aumann showed core competitive market
  allocation.
• Others showed other solutions correspond too.
• Shapley Value fair allocation
• Owen Littlechild airports.
• Fragnelli et al railways.
• If you define fair carefully, you can get the
  same results as economic efficiency attains.

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A Case for Fairness?

• Easier to implement?
• Better understood.
• Possibly cheaper.
• Solves some problems?
• Information asymmetries.
• Problems of second best.
• Regulatory risk.