Cost Allocation in Railroad Regulation
Volume: Volume 3, No. 1
Issue: Spring 1972
Pages: pp. 26-41
Authors: Zvi Griliches
Title: Cost Allocation in Railroad Regulation
Abstract: This paper reviews a number of cost studies conducted by the Cost Finding Section of the ICC purporting to show that the elasticity of total railroad costs with respect to output (percent variable) is 0.8.
These studies are criticized primarily for using deflated and also irrelevant data. Deflation by miles of track leads them to evaluate this elasticity as the conceptually wrong "average" railroad level. In the course of the paper the statistical reasons for and against using deflated variables are explored in some detail and alternative computations are presented indicating that the same data are consistent with constant or only mildly increasing returns to scale to a proportionate expansion of traffic. Several published econometric studies of railroad costs are also reviewed and found to be consistent with the absence of significant increasing returns to scale to an indiscriminate expansion of traffic.