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High fares are good for you

Patrick Crozier sees that the railways are not immune to the same laws of supply and demand as everyone else

The news that the government is considering removing rail fare controls has, in media parlance “raised fears” of a massive increase in prices.

For once the fear is the right word. Allowing railway companies the freedom to set their own fares does seem scary. The man waiting for the 08:22 has to get to work. For him there is, to all intents and purposes, only one way of getting to work – the train. There is no choice. Buying railway tickets is not like buying bars of chocolate.

So, there must be controls, right? Wrong. Fare controls are amongst the most damaging forms of regulation that governments can impose on a railway. Here, there were very few controls and very few complaints until the 1920s. London and its railways expanded in tandem bringing suburbia to the masses, all at an affordable price. In the 1920s the state imposed controls on freight charges. Railway profits went for a Burton. Then, during the Second World War, the government froze fares while inflation let rip. The railways emerged in a parlous state, in dire need of a major overhaul. During nationalisation fares were constantly being held down while the industry gradually declined. It is significant, that British Rail’s happiest time was during the 1980s when it was allowed to increase fares more or less at will. Incidentally, the chief reason why Japanese trains are so overcrowded is, once again, state-imposed fare control.

But what of the man on the 08:22? What’s going to happen to him when he’s left to the tender mercies of the market? Well, the bad news is that, intitially at least, his fares are going to go up. Quite a lot in fact.

The interesting thing is what happens next. If fares are high and are kept high and passengers see no improvement in service they will start to make different arrangements. Some will move to somehere near a cheaper railway. Others will change jobs to somewhere nearer where they live. Slowly but surely the railway will start to lose revenue.

At this point the market starts to come into its own. Sure, some railways will exhibit a couldn’t-give-a-toss attitude, put up the fares, keep them high and do nothing in return but their profits will decline. But others will take an entirely different approach. They will use the price signal to improve quantity and quality. They will introduce lower fares for those travelling before the peak. They will introduce automatic fare reductions in cases of poor punctuality. They will increase capacity and they will spruce up stations (where they don’t rebuild them). They will do this because higher fares will tell them that there is a market out there waiting to be satisfied and satisfied markets mean nice, fat pay cheques.

When fares are set free the man on the 08:22 will see a step change in the quality of the service. It won’t happen at once (railways are not like that) and it won’t be without pain, but it will happen.

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