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Rail Privatisation
Railways - one for all or all for one?
A natural monopoly is a firm that gains significantly from economies of scale. The economies of scale occur at such a high level of output that it is only practical to have a single firm in the industry. If there are more firms then the average cost of production will rise. We can see this in the diagram below. The optimum size of the industry occurs where the LRAC curve is at a
minimum. If there were two or more firms then the unit cost of production would be higher.
Economies of scale mean that as the firm grows in size, the cost per unit decreases. There may be external or internal economies of scale. There are various different types including marketing economies, technical economies, risk-bearing economies and financial economies. The main part of the railways that is a natural monopoly is the rail infrastructure - that is the track, the
stations and the signalling equipment. It would be impractical to have that run by more than one company and so privatisation meant that all this activity was put into the hands of one company - Railtrack. Railtrack then lease the track to the train operating companies.
There are 25 train operating companies and they run the trains themselves. The train companies run under franchises that are awarded by the Shadow Strategic Rail Authority (SSRA). Railtrack are regulated by the Office of the Rail Regulator (ORR). The justification for privatising a natural monopoly like the railway system was to improve the service and increase investment. Neither of
these have happened yet to any great extent and the success of privatisation therefore has to be questioned.
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