Skip to main content

What is (not) wrong with high rail fares in the UK?

On Saturday rail fares in the UK rose by an average of 1.1%. This is the latest instalment in a long running trend of fair increases. Indeed, average fares have risen by around 40% over the last decade. As usual passengers were queuing up to say how disgraceful it all is. This year the opposition leader Jeremy Corbyn joined the fray with his standard call for a renationalisation of the railways. But what is the problem with high rail fares?
       The main reason I ask this question is one of revealed preference. At the same time as complaining about high fares, most passengers also complain about having to stand on over-crowded trains. Indeed, use of the railway has soared, with over 70% more journeys now than in 2002. Moreover, I don't think that anyone would seriously dispute that the UK rail network has just about reached the limit of its capacity in terms of the number of trains operating.
        If a price rise is accompanied by a reduction in demand then we can start to think about firms exploiting a monopoly position to extract high profits. But, when a price rise is accompanied by an increase in demand then the only logical conclusion is that there is excess demand. And if supply, in the short term, is fixed by the extent of the railway network then there is a strong argument that prices are not high enough.
        Put simply, if passengers continue to use the railways at higher prices then they reveal that prices are not too high. The response to this would no doubt be that passengers have no choice to use the railway. But that is not true. Passengers can change where they live, change job, change the time they commute etc. Furthermore, enterprising soles could no doubt come up to alternatives to high rail fares such as companies that allow working at home or have office hours that can exploit off-peak fares. From an economists perspective, passengers choose to pay the high fares.
        Another objection to high fares is that it disadvantages the poor. This argument, though, does not stand up to any kind of scrutiny. The main users of the rail network are the relatively well off, not the poor. Also, despite high fares, the rail network is heavily subsidised by the taxpayer. To lower fares would require an inevitable increase in taxpayer subsidy and would, most likely, be a regressive policy that benefits the relatively well off. (A recent article in the Economist touches on these issues.)
          If high rail fares are neither inefficient, nor inequitable, what is the problem? Suppose you spend £50 for a ticket on a commuter train and then have to stand up the whole journey. The economics textbook tells you that you reaction is supposed to be: I wish the fare had been £100 because then less people would have turned up and I would have got a seat. The common reaction, however, is presumably something like: when I pay £50 I expect a decent service and standing-up is not good enough. It just seems plain unfair to pay so much for a poor quality product. In a seminal article published in 1986 entitled 'Fairness as a constraint on profit seeking', Daniel Kahneman, Jack Knetsch and Richard Thaler show that people particularly dislike price increases that are due to shifts in demand. The outrage at rail fare increases seems to fit that picture.
        So, what could we do? Lowering fares might make people feel less exploited but would only exasperate excess demand. So, this is not the solution. Increasing supply would help but is only a long run possibility. Another option is to push fares higher but put a headline grabbing tax on the rail companies. Then, at least, passengers would not feel exploited. The train operating companies, though, do not make particularly high profits and squeezing these further is unlikely to increase the quality of rail services. Which brings us finally to renationalisation. If this is to lower fares then the taxpayer will have to pay the difference. And as I have argued this benefits the rich at the expense of the poor, which hardly seems desirable. The status-quo, therefore, seems not so bad.

  

Comments

Popular posts from this blog

Revealed preference, WARP, SARP and GARP

The basic idea behind revealed preference is incredibly simple: we try to infer something useful about a person's preferences by observing the choices they make. The topic, however, confuses many a student and academic alike, particularly when we get on to WARP, SARP and GARP. So, let us see if we can make some sense of it all.           In trying to explain revealed preference I want to draw on a  study  by James Andreoni and John Miller published in Econometrica . They look at people's willingness to share money with another person. Specifically subjects were given questions like:  Q1. Divide 60 tokens: Hold _____ at $1 each and Pass _____ at $1 each.  In this case there were 60 tokens to split and each token was worth $1. So, for example, if they held 40 tokens and passed 20 then they would get $40 and the other person $20. Consider another question: Q2. Divide 40 tokens: Hold _____ at $1 each and Pass ______ at $3 each. In this case each token given to th

Nash bargaining solution

Following the tragic death of John Nash in May I thought it would be good to explain some of his main contributions to game theory. Where better to start than the Nash bargaining solution. This is surely one of the most beautiful results in game theory and was completely unprecedented. All the more remarkable that Nash came up with the idea at the start of his graduate studies!          The Nash solution is a 'solution' to a two-person bargaining problem . To illustrate, suppose we have Adam and Beth bargaining over how to split some surplus. If they fail to reach agreement they get payoffs €a and €b respectively. The pair (a, b) is called the disagreement point . If they agree then they can achieve any pair of payoffs within some set F of feasible payoff points . I'll give some examples later. For the problem to be interesting we need there to be some point (A, B) in F such that A > a and B > b. In other words Adam and Beth should be able to gain from agreeing.

Some estimates of price elasticity of demand

In the  textbook on Microeconomics and Behaviour with Bob Frank we have some tables giving examples of price, income and cross-price elasticities of demand. Given that most of the references are from the 70's I'm working on an update for the forthcoming 3rd edition. So, here is a brief overview of where the numbers come from for the table on price elasticity of demand. Suggestions for other good sources much appreciated. Before we get into the numbers - the disclaimer. Price elasticities are tricky things to tie down. Suppose you want the price elasticity of demand for cars. This elasticity is likely to be different for rich or poor people, people living in the city or the countryside, people in France or Germany etc.etc. You then have to think if you want the elasticity for buying a car or using a car (which includes petrol, insurance and so on). So, there is no such thing as the price elasticity of demand for cars. Moreover, the estimated price elasticity will depend o