The Costs of Price Regulation: Lessons from Railroad Deregulation

1
The Costs of Price Regulation Lessons from
Railroad Deregulation

• K. Boyer, Rand J., 1987

2
Costs Of Price Regulation
PREG
C_ALT
G
H
C
D
Q_REG
Q
Q_DIV
3
RR Rate Data

• Data annual figures for 1970-1985 on
• RATE avg revenue per ton-mile
• WEIGHT avg weight of freight trains
• DEREG 0/1 dummy
• 0 through 1979, 1 since 1980

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Railroad Rate Evidence

• Year RATE (/ton-mile in 1985)
• 1970 3.82
• 1975 3.68
• 1980 3.38
• 1985 3.05
• ln RATE 5.56 .019DEREG - .704WEIGHT
• (std errs) (0.026) (0.109) R2
  .92

5
Market Share Data

• RSH share of shipments by mode
• (rail, truck type)
• 47 3 digit manufacturing industries
• from the Census of Transport

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Mkt Share Evidence

• Modal Share of
  Unweighted Manuf Shipments
• Year Rail For Hire Motor Carrier Private Motor
  Carrier
• 1963 42.7 34.3 18.6
• 1967 44.5 33.5 18.6
• 1972 39.1 35.7 21.0
• 1977 28.6 35.2 32.4
• 1983 20.1 39.3 30.9
• Regression
• ln(RSH/(1-RSH) D(SIC Dummies) -0.39TIME -
  .385DEREG
• (.005) (.100)

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Boyer's Conclusion

• Regulatory economists promoted de-regulation on a
  flawed model
• rates higher than costs gt inefficient diversion
• Data are inconsistent w/ basic model
• "to the extent that economic costs were
  associated with rate regulation, they were costs
  of forcing railroads to carry excessive traffic
  by charging prices that were insufficient"
• Consensus (Ellig)
• Competition allowed firms to adapt and reduce
  costs of rail transport
• Two decades later, it is clear that costs
  prices are both lower