RAILROAD COSTS, RETURNS TO SCALE, AND EXCESS CAPACITY. IN: RAILWAYS

In this study, a model is developed for estimating two types of potential scale economies in the railroad industry: returns to traffic density and returns to firm size. The model is developed by making short-runs a function of both traffic and plant investment (trackage), and is then estimated over a cross section of railroads. A long-run cost envelope is derived from the estimated short-run relationship. Results indicate substantial unexploited economies of traffic density for most railroads, but constant long-run returns to scale. These findings imply that much can be done, possibly including track abandonment, to achieve a market solution to the financial problems faced by the railroad industry.