It can be seen that there has been a decline in rail safety since privatisation, as the number of accidents have gone up in successive years with slight declines in 1998/99 and 2000/01. The reasons for privatising were to improve the service and increase investment but neither of the motives has taken place to any large extent and the success of privatisation can therefore be questioned. Investment is vital for all businesses, economists often say that investment is current consumption that has been given up, one can therefore say there’s an opportunity cost to investment i.e. the consumption.
There was very little investment in the network when under government ownership, as the control of expenditure was the government’s main motive. This made the privatisation process begin badly with hardly any investment funds devoted to it. Though, the investment record of the private sector has not been proved to be better than that of the public. The announcement in July 2000 of the i?? 60bn as part of the ten year government transport plan should generate a substantial enhancement.
But majority of these funds are coming from taxpayers’ money, giving rise to the case that government should take equity stake in Railtrack in exchange for the investment. Railtrack will make excess profits as a monopolist and the only firm producing in the market, can restrict quantity sold, raise prices and earn high profits. But in this case, infrastructure is fixed and in order to be used by train companies, they will have to accept whatever price Railtrack is leasing it out to them as there are no other means to run the trains. On the one hand, it could be argued that Railtrack’s profits are essential to provide funds for re-investment.
But on the other hand, it can be said that the firm is exploiting customers and making supernormal profits. Supernormal profit is the profit over and above the return which the owners could have earned by lending their money elsewhere at the market rate of interest (Beggs et al). Illustrated diagrammatically: Price The optimal position is at Q* where MC=MR and a profit maximising monopolist will produce at this point. In this diagram, the quantity can be sold to consumers at price P* (that is; Rail track having a fixed amount of infrastructure can lease at a price P*) which is in excess of the average cost AC1.
At the point where AR is greater than AC, Rail track will be making supernormal profits. The total level of supernormal profit is represented by the shaded region. Therefore, the final burden of the high prices charged will rest on the train customers because they are the final consumers. However, variations in train prices and the elasticity of demand have a great influence on pricing. Elasticity of demand is the degree of a change in quantity demanded to a relative change in price. There are a variety of consumers with different elasticities e. g. people travelling for business, for leisure etc.
People travelling for business would have a very steep-sloped demand curve i. e. inelastic demand which is when there’s a less than proportionate change in quantity demanded to a change in price. Price The diagram above illustrates an inelastic demand curve and it can be seen that as prices rise from P1 to P2, there has been a less than proportionate change in the quantity demanded from Q1 to Q2, making it possible for the train companies to charge high prices to this category of people as the demand only falls slightly so train companies would generate greater revenue.
People travelling for leisure will use the same trains as well as those for business, but the slope of their demand curves will be less steep as their travel is not obligatory. Their demand curves will be more elastic: From the diagram, it can be seen that a change in price from P1 to P2 produced a more than proportionate change in the quantity demanded. Charging very high prices to this group of customers will not be profitable as it will put customers off, but charging low fares will increase revenue. This pricing form is known as price discrimination.
It is the practice of selling different units of a good or service for different prices (Parkin, 2000). It is effective when there is no leakage between markets, which are separable in some way to avoid resale. In this case, the users of the rail network are separable by time (peak or off-peak) as users at different times have different elasticities of demand. The marginal cost of an extra user will also affect the price of train tickets. This is because the train companies have fixed costs and will still have to run whether the trains are filled with customers or not.
It will be logical for the train companies to make customers pay extra at the last minute as this could help cover their fixed cost rather than not carry them at all. For example, if i?? 5 were paid by 10 customers instead of i?? 12, the train company would receive revenue of i?? 50 by transporting them instead of nothing at all. In conclusion the above, explanations show that there would have been market failure in the rail network, but government intervention and the privatisation have brought about more investments and less delays in the network services.
In addition, the government has tried to provide a perfect solution by encouraging the use of other means of transportation and utilising economies of scale which will, in turn, boost the economy. Nevertheless, the new policies adopted by the government (e. g. privatisation) have brought many changes to the network services and further improvements are yet to come. Finally, with the structuring and reconstruction of rail network, better services are expected in the near future by the consumers.