South-Western College Publishing - Economics  
The Railroads Are So Busy, They Don't Know if They're Coming or Going
Subject Railroads cannot keep up with increases in demand for transportation, and are raising rates as a result.
Topics Supply and Demand; Production and Costs; Profit Maximization and the Firm
Key Words Supply, Demand, Costs, Profit, Transportation, Competition, Substitutes
News Story

Years of retrenching in the railroad industry is coming back to haunt it. Reductions in demand for railroad freight transportation over the last few years caused reductions in personnel and equipment. This year, as a result of the surge in agriculture and in the economy overall, the industry is struggling to keep up.

Farmers have seen demand for their harvest surge as harvests in the rest of the world have shrunk; as a result, farmers are trying to get their goods to export markets to take advantage of higher prices. However, given the reductions in personnel and equipment in the railroad industry, both growers and exporters are finding that getting the goods to the market is much more difficult than expected. While delays may be relatively common during the harvest season, some grain elevators in the Midwest have been waiting for almost two months for trains to load and send to export terminals.

Railroads have been busy trying to buoy public support over this period, implementing new faster schedules, hiring more personnel, purchase more equipment, as well as offering guarantees of on-time delivery for a premium over their regular tariffs (freight prices). For now, some railroad companies are increasing their transportation fees (tariffs) by 8-10% to offset the surge in demand.

Repercussions are felt in many industries if the railroad industry cannot meet demand. Farmers, potentially facing a huge increase in demand for their goods, are seeing their profitability eaten away by the increased transport cost, or by the significant delays in transport. The trucking industry, typically more expensive than rail transit, has seen an increase in demand for its services as well.

(Updated January, 2004)

Questions
1.

Demonstrate graphically why railroads are being forced to increase the price of its services.

2. Does this rail transport shortage affect a farmer's fixed or variable costs? Why?
3. If farmers were operating in perfectly competitive product market, what would be the impact on their profits? Demonstrate this graphically with MR, MC and ATC curves.
4. Is this a short-run or long-run issue for the railroad industry? Why?
Source Scott Kilman and Daniel Machalaba, "Railroad Logjams Threaten Boom in the Farm Belt," The Wall Street Journal, 1 December 2003.

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