January 2016

16 January 2016
A generic piece on fare increases v2.0
Patrick Crozier

Every January in Britain, the rail companies put up some of their fares. And every January in Britain lots of people complain.

Which is odd, because most other businesses are constantly changing their prices but we don’t get anything like the same fuss when they happen to put some of those prices up.

The reason, for the most part, is government. In Britain the government uses the threat of violence to regulate a certain number of fares, largely those on London’s commuter routes. In January the government allows rail companies to increase their fares in line with inflation plus or minus a small percentage.

As well as involving violence regulation has all sorts of negative side effects. The main one is overcrowding (see A generic piece on overcrowding). It also deprives rail companies of the sort of price signals they need to run their businesses successfully.

The term “price signals” deserves some explanation. Essentially, it is a rather hoity-toity economic term for when consumers and producers change their behaviour in response to changes in price. As consumers we do it all the time. We do it every time we say “that’s too expensive” or “that’s good value”. As employees we say do it when we say “that job’s offering more money, I think I’ll take it.”.

But producers do it too. They say “That’s expensive, we could make a profit out of doing that.” It is the phenomenon that makes markets work. Without it we wouldn’t have the adundance of goods of all kinds we currently enjoy.

Because rail companies are deprived of price signals they don’t know how much people are genuinely prepared to pay for a seat, how much they are prepared to pay to stand, and, therefore, don’t know what sort of mix of seating and standing they should be providing. Nor do they know how many trains they should run and whether increasing the number of trains would justify the cost of, for instance, new signalling.

OK, so maybe you’re not quite so keen on the theory. But take a look at the practice. What do rail companies do when they are free to set their fares? Before the Second World War there was very little regulation of fares. In the period from 1900 up to then all sorts of improvements to the railways took place. This was mainly in the form of electrification but also other things such as comfort, safety, speed and frequency. That’s not to say that some people didn’t stand, they did, but generally-speaking things were getting better. Few people complained about fares being too high.

If you’re unconvinced by that look at other industries. The general rule is where there are price controls there are shortages and where there aren’t, there’s abundance.

It is worth pointing out that while allowing rail companies to charge something nearer the market rate is a step in the right direction so long as regulation and the threat of regulation exists, it is difficult for companies to plan for the future. And given the wheel-rail split and the short-term nature of franchises that is even more the case.

So, you would allow train companies to charge whatever they like?

But wouldn’t they charge the earth? And when they do wouldn’t that mean that lots of people could no longer afford to get to work and end up unemployed?

What we have here is a conflict between the short term and the long term. The advantages of market prices will for the most part only be seen in the long-term while the disadvantages (higher prices) will be seen almost immediately.

One of the sad things is that we don’t know how severe the short term pain is likely to be. It might indeed lead to the doomsday scenario but equally other things might happen. For instance, in many cases employers may find that they don’t need all their employees to show up on the dot at 9 o’clock in the morning. So, it may be possible for many of them to travel off-peak. Now in Britain we already have low prices after 0930 but not before 0700. This is odd because before nationalisation there were lower fares for early-morning travel known as Workmen’s Fares. If they could do it then we can surely do it now. Equally, many rail companies may take the view that the profit-maximizing price isn’t that much higher than it is at the moment or that a better way to gain goodwill would be to approach it at only a slow pace, say 20% a year or so. But the point is that impoverishing ones customers is unlikely to be good business. The sensible rail company would seek to minimize the pain.

What sort of long-term gain do you see?
It is difficult to gaze into the future. That’s one of the weaknesses of being in favour of freedom: you can’t predict with any certainty what will happen. For instance, it may be the case that something comes along which replaces railways for good.

I could speculate on rail companies running longer trains or double-deck trains or having different classes of carriage: guaranteed seat, standing-room only etc or introducing seats that are locked out of use at peak hours, but I really have no idea what would happen. All I can be sure about is that it is likely to be a lot better than the situation that we have at the moment.

I take heart from the fact that in the days of fare freedom when the London and South West Railway was about to introduce the first electrified services they reduced the fares. Why? One can’t be certain but my guess is that electrification meant that they could run more services so they wanted more people to use them.