Rail as a natural monopoly and possibilities of its regulation

Abstract

Government regulation is required for goods with a gap between social and private costs and social and private benefits. Such goods can be classified into three types:

1. toll goods, which are non-rival but exclusion from use is possible;
2. common pool goods, which are privately consumed and exclusion is not possible;
3. collective goods, which are jointly consumed and exclusion is not

Toll goods (the railway for example) are characterized by the need of a significant amount of capital and an almost zero marginal production cost. As one single asset is enough to meet the entire public demand, providers of such services can be defined as natural monopolies and as so the issue is to avoid those monopolies to supply scarce services at high prices. Efficient regulation requires the government to stand apart from and an independent regulatory agency to restrict monopolist operation. This regulatory task can be accomplished by simulating competition (price cap regulation) or by motivating competition (free access to networks).

We address this issue focusing mainly on the Hungarian railways.