Economics Exam Ideas for Theme 3

Question 1

When was British rail nationalised?

What 2 parts.

Answer 1

1993 - national rail infrastructure (state-owned) and train operating companies

Question 2

What are some key statistics in 2016-17 of the rail system in UK?
GDP…
Employment…
Passenger satisfaction with punctuality…
Subsidy…

Answer 2

1. Contributes £10bn per annum of GDP
2. Employs 216,000 people
3. 77%
4. £4.2 billion - government

Question 3

What has happened to passenger revenue for the UK rail industry?

Answer 3

Grown in ordinary fares, season tickets, and all tickets

Question 4

Government support fell after financial crisis what year?

Answer 4

2008/09 to 2016/17

Question 5

Why nationalise the railway?
points countering:

Monopoly…
Consumer fares…
Profit flow…
Investment…

Answer 5

Rail network is a natural monopoly suited to state control to achieve economies of scale - however might experience DOS / X-inefficiency

Rail fares can be controlled to improve affordability for rail passengers - nearly half of all passengers fares are already regulated?

Profit flow direct to the tax payer rather than to shareholders of private train companies. - lead to a reduction in fares

State can direct investment into the network and borrow more deeply to fund it - however private TOCs have been investing heavily in new rolling stock and facilities

Question 6

Case for private owned/run railways?
points countering:

Competition…
Efficiency…
Regulate fares

Answer 6

Competition on lines is more important than who owns the railways - allow more operators - rail system close to full capacity

Private sector firms are more likely to improve dynamic efficiency and avoid x-inefficiencies - however they can increase prices to relent consumer surplus

Possible to regulate more fares on services run by private train operating companies - even with regulation fares have climbed more than 120% since 1995.

Question 7

The importance of economic efficiency with the railway industry?

Efficiencies…

Answer 7

1. Productive efficiency
   - operating costs
   - capacity utilisation of the system - using up marginal spare capacity
   - ability to benefit from economies of scale / avoiding DOS
2. Allocative efficiency
   - ticket pricing - do prices reflect marginal costs of producing a service?
   - effects of price discrimination on consumer welfare
   - peak and off-peak pricing
3. Dynamic efficiency
   - improvements to customer service
   - reliability and safety of trains, frequency of services, customer service, information

Question 8

What are the broader issues in this debate over state vs private?

Competitiveness, tourism...
Expensive...
Market failure...
Control...
Affordability...

Answer 8

1. A successful UK rail industry is needed to sustain and improve the competitiveness / support tourism / regional economic balance
2. UK rail network is expensive to run. Huge investment needed - unlikely that private sector can provide sufficient funds
3. Market failure issues are also important. e.g positive externalities
4. Much of the UK rail industry is already under state control /or direct regulation.
5. Affordability of rail travel is a major issue although dynamic pricing cuts fares for many segments of the market e.g. student rail cards

Question 9

Third degree price discrimination?

Advantages..?

Answer 9

Involves charging different prices of people.

• Allows firms to be able to increase revenue (able to stay in business)
• Increased investment (dynamic efficiency)
• lower prices for some
• manages demand (encourages people to travel at unpopular times)

Question 10

Third degree price discrimination disadvantages?

Answer 10

1. Higher prices for some (allocatively inefficient)
2. Decline in consumer surplus- increased inequality
3. Potentially unfair (those paying higher prices may not be representable of what the inelastic demand group are - increased poverty)