Wanna Argument?
Rail Privatisation
Investing in the straight and narrow?
Investment is vital for all businesses. Economists often argue that investment is current consumption that has been given up. In other words there is an opportunity cost to investment. We have to consume less now to be able to invest and then consume more in the future. However, the railways have been starved of investment while under public ownership. There is little doubt that far too little was invested in the railways by governments who were all trying to keep government expenditure under control.
Reducing capital expenditure was always a much easier solution than trying to reduce current expenditure. Once the process of privatisation of the railways was started, this simply made the situation worse with scarcely any investment funds committed to the industry during the period of privatisation. However, the record of the private sector has not been significantly better yet. The announcement in July 2000 (as part of the government's 10 year transport plan) of ã60bn over 10 years should certainly help provide a major boost. Of this ã60bn nearly half is coming from taxpayers. There are therefore some who argue that the government should take an equity stake in Railtrack in exchange for this investment.
One of the classic economic arguments against monopolies is that they will produce less, charge more and make excess monopoly profits. Railtrack would argue that the profits they have made are essential to provide funds for re-investment, but others may argue that they have been supernormal profits. We can see how monopolies make supernormal profits in the diagram below.
The level of profit is shown on the diagram by the difference between average cost (AC) and average revenue (AR). Where AR is greater than AC then the firm will make a supernormal profit. The gap between AR and AC is the supernormal profit per unit and to get the total profit you need to multiply by the level of output.